Top Seven Stock Trading Myths

The stock market can be tricky business and there are countless posts and forums discussing the best tactics and predictions. Unfortunately, there is some universal garbage out there, but thankfully, we are here to bust the stock trading myths once and for all. Read on!

1. Investing is the Same as Gambling

Although there is no question that investing and gambling have some similarities. The two should not be considered the same. So for example, logging in to Royal Vegas Casino and hitting the slot machines is not the same as what an investor or stock trader does.

2. The Best Companies Have the Best Stocks

There is absolutely no truth in statements that suggest the best and most successful companies have the best stocks. A perfect example is Microsoft. The company’s revenue between 2000 and 2013 tripled, while their stock value fell 37% - myth busted!

3. Excessive Diversification is Crucial

Note, the following does not advocate pouring your investment into one stock. Even the best and most successful traders are flag bearers of diversification to an extent - and they support it if you are new to the game as a way of minimising losses and protecting yourself.

However, stocks work both ways. While you may be diversifying for investment protection, extreme diversification puts a cap on your potential earnings. After all, not all your stocks will rise when you have diversified a lot. Some are bound to fall.

4. Stocks are More Volatile than Bonds

Yes – this is actually true when looking at it over a short period. However, with a wide lens, over the long term it is not always true. In short periods, a stock can lose significant value of around 20% which doesn’t happen to bonds. Yet, the numbers tell us the roles are reversed when looking at volatility over many years.

5. Strong Economies Make Successful Stock Investment

Another falsity is that stocks will only do well when they are part of a successful economy. Recent suggests that a strong economy is not necessary for a stock investor to make a worthwhile profit. In fact, during the USA’s recession periods, stocks have earned traders an average of 10%. It could be a big mistake to stay away from trading just becomes economic times are challenging.

6. Success Equals Collecting Profits

Casing in your stocks to take home the bags of money is a good sign for any investor or trader. However, this is not a bulletproof statement and is somewhat of a myth. For one, stocks do not have a roof over their head. They can surge as much as they want in value. Therefore, cashing out can be a sign of a missed opportunity. Getting out too early is a problem. Just ask the third co-owner of Apple that sold his share for $800. Moreover, leaving your investment does not mean you have tax to pay.

 

7. Buy Stocks After a Huge Fall

Remember that a stock can go all the way to zero. There may be an expectation that a stock will rise again, but is that expectation justified and backed up by knowledge? If not, then you are rolling a dice and expecting something you have not even looked into.