Understanding how to invest in share markets is all about dispelling the popular myths surround the share markets. Most myths are based on partial knowledge and understanding of the nuances of the share market.
But myths, being what they are, tend to get perpetuated. Here are 10 myths that you need to bust to actually understand how to invest in share markets…
10 Myths You Should Know While Investing in Share Markets
1. Stock markets are a place for the wealthy
Wealth people are active in the share market but that does not mean that stock markets are closed to others. Thanks to demat, you can even buy 1 share of any company in the stock market. To buy 1 share of Reliance Industries you just need Rs.950. With that small an investment you can effectively participate in the share market. Also small money can create big wealth in share markets over the long run. For example, Rs.10,000 invested in Wipro in 1980 will be worth over Rs.500 crore today.
2. I need to be a stock market expert to invest in shares
Not exactly! You surely need to make an effort to understand the business of a company before buying its shares. You need to ask the right questions to your broker and read up on the stock. Don’t listen to tips. You need to be an expert in charts if you want to be a trader. Investing is a lot of common sense and it is all about asking the right questions before investing.
3. I am 40+ and do not have the risk appetite to invest in shares
How to invest in share markets at the age of 40+ is a normal question. Remember, biggest risk that you are exposed to is not taking any risk in the market.
If you turn conservative and put all your money in money market funds you will never generate wealth. As you grow older you can reduce your exposure to equities but you do not need to avoid equities altogether. In fact, equities are a must if you want to create wealth.
Related: When Retirement Savings Just Aren’t Enough
4. Great companies will give great stock market returns
There are great companies like Reliance and Hindustan Unilever which did not give not give any returns for long periods of 10-12 years.
When a company becomes very large, it is normally difficult to give aggressive returns. Look at Infosys. It gave fantastic returns between 1995 and 2010. In the last few years it has struggled, although it is still a great company.
5. Higher risk means higher returns in stock markets
Get the causal relationship right! Higher returns entail higher risk but that does not mean that higher risk will lead to higher returns.
If you take a high risk and buy low quality penny stocks that that may not lead to higher returns. On the contrary, you may end up losing up all your capital. How to invest in share markets is all about measuring your risk and setting your risk-return trade-off.
6. Easiest way to make money is to buy whatever the FIIs are buying
That is surely not a good idea. FIIs may be buying for different reasons. Firstly, they may be buying just to diversify their portfolio. Secondly, FIIs may be buying in one account and selling in another account. Only the large deals get reported and hence can be misleading.
Thirdly, even within FIIs there are hedge funds with a higher risk appetite and these stocks may not exactly suit you. Lastly, quite often FIIs create arbitrage positions i.e. they buy equities and sell futures against them. Chasing them and buying the same equities does not make sense.
7. Stock markets entail a lot of investment
As we made out the case earlier, there are stocks like Avanti Feeds, Eicher Motors, TVS Motors and Escorts that have generated very attractive returns in the last few years.
For example, an investment of Rs.1 lakh in Avanti Feeds 5 years back will be worth over Rs.60 lakhs today. By identifying the right stocks and having patience it is possible to create wealth in equities in the long run.
8. Investing is a lot like gambling in the casino
How to invest in share markets is different from how to trade and how to speculate. When we talk about speculation, it is a lot like gambling. But there is still a difference.
In gambling you have no idea of the odds whereas in speculation you still have some idea of the odds. As the old saying goes, in the short run the stock markets may be a slotting machine but in the lot run it is a weighing machine. When we talk of investing, we are talking about the long run.
9. Stock market investing is all about buying low and selling high
Buying low and selling high is easier said than done. It is impossible to consistently predict the highs and lows and trade accordingly. But the more important thing about how to invest in share markets is something different.
As Warren Buffett said; “In the stock markets time matters more than timing”. In fact, research shows that even if you consistently catch all the bottoms and tops, the return advantage is not much greater than a buy-and-hold strategy in equities.
10. Every stock that falls will bounce back eventually
Whenever you get this idea think about stocks like Kingfisher, Deccan Chronicle, Satyam and many others which vanished without a trace. There is a difference between a quality stock correcting, a cyclical stock correcting and a worthless stock crumbling. How to invest in share markets is all about knowing this critical difference.
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