Monday, September 25, 2017

Clearing up Common Misconceptions

Misconception #1: Investing in Stocks is Expensive

Through experience, I have discovered that most new investors think that they should only invest in cheap stocks that are under $10 because it fits their low budget. However, this is not how stocks work. Every investor should think of an investment in terms of a percentage increase/decrease and not in terms of dollar value. This is because investment amounts change over time and you want to reach either reach the same goal or do better. It’s a common misconception, a friend of mine who had $800 was once worried to buy a stock that was $150 a share because he thought that he would make less money off of it. He thought that owning less shares would mean you would earn less, but that is not true at all. For example, the stock that was sitting at $150 could rise 10% to $165 a share, which is a quick 10% profit off of an $800 investment. On the other hand, a certain investor could also invest $800 in a stock that trades at $3.50. However, what if it moves only to only $3.52? It may look cheap and profitable but in the end the other trade made more money. I recommend new investors especially with a tight budget to use the Robinhood trading platform because it has no fees, and so maximizes the profit.

Misconception #2: The Stock Market is Like Gambling

All investors should understand that both gains and losses are completely normal. The goal is to have your gains outweigh the losses. Non-investors have the mindset that investing in stocks is risky, and it may lead to financial debt, or worse bankruptcy. That mindset is the worst case scenario in investing, and that would only happen if investors makes mindless decisions. No one should throw money into a stock and hope that it will go up sometime in the near future without having any prior knowledge on trading, or on the company. That is not how business works. Investors should put in the effort beforehand to research the stock and follow the other guidelines I posted in my “How to Pick The Right Stock” article. Once you have picked the stock, make sure to stick to the facts and research to make your own predictions later on. At the end of the day, your knowledge and confidence about the stock will help you keep track of the stock prices. At the same time investors should be smart and careful because throwing too much money into a stock is dangerous. If it were to dip, your best scenario is to have emergency cash ready and use it to purchase shares at a much lower price to even out the average cost per share. Investors that panic and sell off will ultimately have heavier losses. Rather than buying a bunch of shares in one trade, I suggest purchasing shares over the course of a couple days or weeks based on the trend of the stock. If the stock rises, then adding more positions in that stock would be a good idea if the stock is not overvalued.

Misconception #3: You Have to be Wealthy

Investing does not require you to be wealthy. A very common misconception is the idea that in order to be an investor you must also have to be wealthy. This is no longer true nowadays because in the past few decades, brokerage (trading platform) fees have actually decreased. Robinhood is fairly new and is completely free. Investing does not require much except for some money, a brokerage account, and a good internet connection. The research and stock information is also now available to everyone. In the past at one point, only the stockbrokers and the bigger trades had this kind of information but now it all comes free by simply opening a brokerage account. Anyone can become an investor.

Misconception #4: The Stock Market is For Business Oriented Males

The Stock Market is for everyone. Today, it is thought that men are the stock market’s greatest and best investors when this is actually in fact false. Just recently, in the last 2-3 years female investors have been on the rise and in 2016 they outperformed most males in terms of yearly performance. You also do not need to have background information in business or finance to begin investing. That kind of knowledge is useful but can easily be learned through trading experience. There are investors from every educational and financial background. Do not let these myths turn you away from the stock market. Think of the stock market is a tunnel of gold waiting to be mined but has a roadblock in front of it. An investor has to surpass that roadblock to reach their gold.


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