Many investors wonder whether they should invest in stocks. Before deciding to invest, it's important to have an accurate understanding of stocks and trading rather than blindly accepting common myths. Here are 3 of those myths and the truth behind them.
1. The Stock Market Is an Exclusive Club for Brokers and Rich People
Many market advisors claim to be able to call the markets' every turn. However, almost every study done on this topic has proven that these claims are false. Most market prognosticators are notoriously inaccurate. Furthermore, the Internet has made the market much more accessible to the public than ever before. The data and research tools previously available only to brokerages are now available for individuals to use. Moreover, discount brokerages and robo-advisors allow investors to access the market with minimal investment.
2. Fallen Angels Will Go Back Up, Eventually
Whatever the reason for this myth's appeal, nothing is more destructive to amateur investors than thinking that a stock trading near a 52-week low is a good buy. Think of this in terms of the Wall Street adage, ""Those who try to catch a falling knife only get hurt.""
Suppose you are looking at two stocks:
X reached an all-time high last year around $50 but has since fallen to $10 per share.
Y is a smaller company but has recently gone from $5 to $10 per share.
Which stock would you buy? Believe it or not, all things being equal, the majority of investors choose the stock that has fallen from $50 because they believe it will eventually make it back up to those levels again. Thinking this way is a cardinal sin in investing.
Price is only one part of the investing equation (investing is different from trading because the latter uses technical analysis). The goal is to buy growth companies at a reasonable price. Buying companies solely because their market price has fallen will yield nothing. Investing in stocks should not be confused with value investing, which is buying high-quality companies that are undervalued by the market.
3. Stocks That Go Up Must Come Down
The laws of physics do not apply to the stock market, and there is no gravitational force to pull stocks back to even. Over 20 years ago, Berkshire Hathaway's stock price rose from $7,455 to $17,250 per share in a little more than a five-year period. Far from coming back down, the stock rose again to over $344,000 per share in Feb. 2020.1 Although it is not true to state that stocks never undergo a correction, the point is that the stock price is a reflection of the company. If you find a great firm run by excellent managers, there is no reason the stock will not continue to rise.
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