Stock trading and investing myths refer to things that are often said but those that are not based facts. These myths may affect how you allocate your money and the top assets to buy.
In this article, we will look at some of the most popular trading myths in the stock market and why debunking them is important.
#1: Trading stocks is equal to gambling
This is one of trading myths that is very common among opponents of day traders. They equate trading as a simple gambling activity where you open a trade, and pray that it goes in your direction of choice.
The fact is that this depends on an individual. There are traders who take trading as mere gambling while others take it as a scientific method of making money.
The latter represents the reality. When you buy a stock, you are becoming an owner of the company. This means that you will receive a small amount of the company’s profits. To make their choices, investors decide which companies will make the highest profits.
The only thing gambling does is take money from the person who made the wrong bet. Nothing of value is created.
But there are other reasons why day trading is not gambling.
#2 – You Need a Lot of Money to Start
A common myth about trading stocks is that the market is built for the wealthy. This is simply not true since everyone has access to the financial market these days. For one, companies like Public, Robinhood, and WeBull have made it possible for anyone to buy stocks using their phone.
Most importantly, these companies have removed the cost involved in buying and selling stocks. Another important fact is that they don’t have minimum balance. This means that you can deposit as little as $50 and start buying shares.
Further, these companies have introduced the concept of fractional shares, meaning that you don’t need to buy a full share. As such, with $50, you can buy half a share of a company that is trading at $100.
Additionally, companies have introduced the concept of leverage, where they lend you capital to invest or trade. While leverage is a good thing, you should be aware of its risks.
Further, you don’t need a lot of money to work in a trading floor. At Real Trading, we help people start their trading floors for only a tiny amount of money, providing them with the buying power.
#3: What goes down will eventually go up
Typically, amateurs think this way. It leads people to buy stock at $10 a share and hope that the price returns to last year’s high. The better plan would be to buy stock in a small company that has recently gone from $5 to $10 a share. If you are choosing your stock based on more than just the price, you will be a better investor.
We have seen many stocks go down and never come back. For example, at its peak, GoPro was one of the most popular companies in the US. Every young person loved its cameras and drones. As a result, its stock soared to $95.
It then dropped and reached a low of $1.98. As shown below, the stock struggled to move back to its all-time high.
#4: A stock that has gone up is going to come down
Unlike many other things in this world, stocks that go up do not necessarily have to come down. It depends on the company. If an excellent management team is running a company, the company’s stock can continue to go up.
One example is Berkshire Hathaway. In five years, this company’s stock went from $7,455 to $17,250 a share. If you had waited for the price to come down before you bought stock in this company, you would not have been able to enjoy the ride up to $170,000 a share and above.
#5: Knowing a little is better than not knowing anything
Of course, it is better to know something than to know nothing about trading stocks. However, you will need a lot of knowledge before you place your money in the stock market. The ones who are not losing a lot of money are the ones who are studying the markets before they invest.
Fortunately, you do not have to do this work on your own. You can hire an advisor to help you. Or, maybe, you could find a trading mentor. You would not want someone to operate on you who has limited knowledge about the body or intricacies of the operation.
The same rule applies in investing. To be good at it, you will need to spend some time practicing and learning.
Related » Risk Comes from Not Knowing What You’re Doing
#6. You can time the market
Another popular myth, especially, among traders is that you can time the market. By timing the market, we mean that you can easily predict when a stock will start falling or when it will start a reversal.
There are tools and strategies that traders use to time the market. Some of these tools are indicators like moving averages and the Relative Strength Index. Also, you can use chart analysis strategies. However, all these approaches are usually not accurate all the time.
Therefore, we recommend that you always protect your trades no matter how confident you are. For example, always set a stop-loss and ensure that you are not over-exposed to a certain stock
#7. More stocks equals to diversification
Diversification is one of the most important things you can do as an investor. However, one of the most common trading myths is that owning 20 stocks necessarily means that you are more diversified than a person who owns 10.
At times, the person who owns 10 stocks can be more diversified than the one who owns 20. For example, if you own 20 energy stocks, it means that you are at risk if the sector has challenges. Therefore, a person who owns four stocks in different sectors will be better off.
#8 – It’s a Man’s World
Another common myth is that trading is a man’s job. This may have been true a century ago. The fact is that anyone, at any age can become a successful trader.
A good example is Ingeborg Mootz who started trading at 83 and made more than $500,000. Her story has been highlighted by a number of magazines such as the Global Brands Magazine.
Kathy Lien, is another woman who has made a fortune as a trader and author of forex related books. In addition, a look at the top leadership of most investment banks will reveal a number of top women traders.
#9 – Day Trading is Easy
Many people have written about how easy it is to make money as a day trader. They state that all a person needs to do is to open a trade, watch it (or set up a take-profit) and then make money.
The fact is that making money as a day trader is more difficult than this. It involves a number of steps that one must follow to be successful.
For instance, one needs to take time reading about the financial market. Then, one needs to understand the platform. Finally, one needs to have a strategy to use as a trader. In fact, most people who start trading fail.
Summary
There are other trading myths that we have not mentioned. For example, there is the myth that you should buy and hold some stocks forever. This is wrong since industries and managements change.
A good example is Netflix, a company that experienced a lot of growth. The shares then dropped sharply in 2022 as competition rose and growth slowed.
External useful resources
- 5 myths about investing in the stock market that are keeping you from building wealth – CNBC
