Here are some common misunderstanding about the stock exchange which inexperienced investor may believe is true. Here are five common myths and therefore the reasons why these might not true.
1.The stock exchange is just like the economy
A common misconception people have is that the stock exchange should behave precisely the way the economy does. When the economy is performing poorly, people think the stock exchange should do an equivalent . However, the stock exchange isn't the economy. Share markets are forward looking. Stock prices usually think about what investors think will happen within the future. Hence share markets usually rise during a recession as investors are looking into the longer term and believe there'll be a recovery within the economy. one more reason the stock exchange doesn't reflect the economy is that that stock prices don't always reflect the intrinsic value of a stock. Investors could also be willing to pay top dollar for stocks during a company that hasn’t been making money yet as they believe this company are going to be very profitable within the future. For more reasons detailing why the stock exchange isn't just like the economy, read our article “Why is that the stock exchange when the economy is heading into recession?”
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2. You'll make tons of cash day trading
Statistics don't support the success of day trading as 4 out of 5 people lose money. One among the most reasons is that a lot of day traders make emotional decisions. Day traders hand over their job to trade full time to undertake and generate enough income to exchange their salary. However as there's such a lot pressure to form money, they have a tendency to form emotional decisions like refusing to sell a losing trade and holding onto losses for too long. The high transaction costs involved in frequent buying and selling also can potentially erode the profits made. There are many successful day traders out there, but that success has often come on the rear of years of experience and many of losses along the way.
3. Investing within the stock exchange is like gambling
Investing within the stock exchange isn't like gambling. one among the most differences is that the majority sorts of gambling can see you lose your money immediately as there's often a binary outcome. If an investor has selected a stock which isn't performing, then it's highly unlikely they're going to lose their entire investment in at some point . an equivalent can't be said about gambling where one bad bet means the player loses their entire cash outlay. there's also A level of risk control which an investor can exert when making decisions on what stocks to get . That is, if an investor is conservative then they will invest in companies that have stable and reliable earnings. A gambler has no control over the danger levels of their decisions as they're risking all their money whenever they're making a bet. We outline more reasons on the blog on link “Why investing isn't like gambling”.
4. Income investors should invest in high yielding stocks
There is a misconception that investors trying to find income can purchase stocks that pay an honest dividend yield. However, after looking closely at income stocks and comparing the returns to growth stocks we will see that the income/dividend stocks don't outperform growth stocks when combining income and capital returns together. Growth stocks don't generally pay dividends when starting out as those companies usually wish to reinvestment funds back to the firm to expand. However, what we've seen is over the years, these growth stocks do eventually increase their dividends therefore the investor benefits from capital appreciation and also a rise in yearly dividends paid. Income stocks on the opposite hand have kept payment of dividends consistent or have a lower dividend payout, but investors may have also experience capital depreciation. On a complete return basis, growth investors are more happy with increasing dividends and increasing capital return. “Income investors should invest in growth stocks, not income stocks”.
5. Buying falling stocks is usually an honest idea
There may be a misconception within the market that purchasing a falling stock is a good idea because the stock are going to be good value for money. the matter with this myth is you'll be catching a falling knife, meaning a falling stock may fall even further. Many investors are frightened of buying stocks that make new highs as they're in fear that it cannot go up forever. the entire point of investing is to possess your stocks appreciate in value. this suggests that they need to be making new highs, otherwise what's the point? a corporation that's making new highs tends to continue making new highs, because it's often an honest business. a corporation whose share price is falling for an extended period of your time is usually a nasty company which suggests it's a nasty investment. it's a fallacy that declining share prices always mean revert and head copy again. this is often because a corporation that has decreasing earnings deserves to possess a decreasing share price. Conversely, a corporation with increasing earnings over time is justified in seeing its share increase over time. The skill in fact is in identifying which companies need to be heading higher and which of them don’t.
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