People get inspired by the stories of successful stock market investors. However, when the time comes to enter the market, people fear because of the existing myths related to the stock market. In this section, we are trying to bust the myths of the stock market and present the facts. Also, we will provide some tips that will help you in your initial phase of stock market journey.
Many people do not want to invest in the stock market because they feel that the stock market is very risky. To some extent we can say yes, it is true. If you invest in the stock market for a shorter duration, then there is a possibility that investors might experience losses. But in the long term, one has a high probability to make profits.
In the above chart, we can see that in the long-run NASDAQ composite index has shown significant growth of ~315% in last 10 years. In the interval, we can see small hiccups due to external environments. However, all these small ups and down are for a shorter duration. Based on this, one can say that one can benefit if they stay invested for long-term and vice versa.
It is important to have finance knowledge while you are trade in stock market. However, it is not true that you can succeed only if you have a background in Finance or strong finance knowledge. There are many known investors who are not from the finance background, but are still successful stock market investors. Let us look at the qualification of some of the renowned stock market investors.
Warren Buffet did Master of Science in Economics from Columbia Business School. After graduating he attended the New York Institute of Finance.
He worked from 1951 to 1954 at Buffett-Falk & Co. as an investment salesman. From 1954 to 1956 he worked as securities analyst at Graham-Newman Corp.
George Soros graduated with a Bachelor of Science in Philosophy in 1951 and Master of Science in Philosophy in 1954 from London School of Economics.
He began his career at Singer & Friedlander of London. He worked as a clerk and later moved to the arbitrage department.
Peter Lynch graduated from Boston College from where he studied history, psychology, and philosophy. Then he earned an MBA from Wharton School of the University of Pennsylvania in 1968.
He started his career as an intern with Fidelity Investments.
Carl Icahn graduated from Princeton University with A.B. in Philosophy. He then entered New York University School of Medicine, but dropped out after two years to join the military reserve force. In 1961, he started his career as a stockbroker for Dreyfus Corporation.
This is amongst the biggest myths that exist in the stock market. Many people feel that stock market investment is similar to gambling and there is a possibility of making losses only. However, this is not true. Stock markets create value for the investors as purchasing a stock of any company is equivalent to ownership in the Company. These investors are eligible for receiving a portion of the company’s profit.
However, gambling does not create value and the person does not become the owner of anything.
Gambling is related to gaining of losing a chance. However, in the stock market, the investment is driven by factors like economic conditions, information about the Company the investor invests. These factors can be studied and predicted and accordingly a decision is taken to make a profitable investment.
Investing in the stock market requires huge money is another myth commonly heard in the stock market. People believe that one must have a lot of financing to survive any losses. However, this myth is also not true. An investor can even start with a few dollars.
There is no doubt when we say that the stock market is volatile and there is a high chance that people may experience losses. At the same time, it is also true that there is a high probability that people can make huge profits by investing in stock markets. Generally, those people make losses in the stock market are those who invest without getting the basics right or panic and exit investments due to short term volatility in the market.
In order to make profits in the stock market, it is very important that people have patience and sound understanding of the market dynamics. Likewise, it is also important to stay away from herd mentality as well as timing of the stock market. It is impossible to time the market. But it is important to stay invested for a longer duration.
Many people believe that one always needs a broker to invest in the stock market. However, if one has a fair understanding of the market and has time to track the market movement, it is possible to invest on your own.
Investors only need a share trading account. It allows investors to hold shares in electronic format and conduct trading activities later.
In Australia the stockbrokers or trading platform providers are Market Participants that must abide by certain rules set by ASIC and the ASX.
The system that identifies the client’s account as a HIN based account, HIN being a Holder Identification Number. Some clients are able to hold shares through an Issuer Sponsor, in which case they will have an SRN (Security holder Reference Number) and these shares are held by a share registry.
All share trades in Australia are electronic, the ASX uses a computer system called CHESS (Clearing House Electronic Subregister System) to manage the settlement of share transactions and record shareholdings. So, all settlements are completed via CHESS.
Another common myth that exists in the stock market is that the rising price of stocks will come down. However, it is not true. If the fundamental of the Company is good, it does not necessarily mean that the price of the stock will come down in case the stock is trading at a higher price. Hence, it is important that investors conduct thorough research about the company, its management, policies etc.
After going through the myths related to the stock market, you must now have somewhat a clear picture about the myths and the actual facts. Once an investor overcome these myths, they can use the wealth creation potential of the market.
The first basic question to have when entering the market is how to start trading on a stock exchange. As pointed in the previous version of this publication, we need a brokerage/trading account. Below are the steps followed to buy/sell stocks.
In the next version of “Welcome to the World of Stock Market” we will look into the types of investors and learn more about some popular investment strategies.
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