This is probably the most common myth which comes in the way of several share market investors. Individuals tend to compare stock market with gambling. However, gambling and stock market are very different from each other. While gambling focuses on winning or losing by chance, investments in stock market seek support from factors such as market history, current economic conditions and information about the company. Unlike gambling, such factors can be studied and predicted to make profitable investments.
Another myth is that stock market investments are only for experts. However, investing in stock market is not reserved for certain group of people. Anyone can participate in the investing world and make the most of its benefits. Investments require an understanding of the stock market and spotting the right kind of shares. However, process of learning is continuous and develops with time. Investing in stock market favours preparation. Thus, such investments are open to anyone who have a strong interest.
Most of the individuals have this myth that to make profits, you should have a sufficient amount of financing to survive losses which might arise along the way. However, this is not true. Share market provides significant opportunities according to the risk appetite of different individuals. Once the trading account is opened, you can invest in shares according to the risk involved in particular security. For example, penny stocks are volatile and carry high risk. Main idea should be to identify the right shares of the company with the help of research and to develop a strategy to reduce losses.
Most investors favour making investments in stocks that have generated strong returns in the past. However, this may not be a viable option always. More often than not, midcap, and small cap companies tend to give higher returns than large-cap stocks. Therefore, understanding of the underlying business of the company is of utmost importance.
It is possible that stock which is trading at INR5 is more expensive than one trading at INR100, as far as value is concerned. P/E ratio is commonly used to measure how cheap a particular stock is. Apart from the P/E ratio, there are several other measures which are used to determine a particular stock’s value. Therefore, investment should be done on the basis of value, and not its price.
Most individuals think that they are better off investing their money than purchasing insurance of any kind. This is completely wrong. Each investment vehicle has its own advantages. Insurance coverages of some sort are of utmost importance. Individuals end up taking a big chance when they depend only on the investments in early years of life, especially if there are dependents.
But why do these myths occur in the minds of individuals? Is it because they end up making losses when the prices slump or is it simply the word of mouth? Well, we believe that its lack of financial literacy due to which such myths take place.