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Eleven Myths About Stock Investment

Updated on June 20, 2011

Stock Investing Misnomers

Investing in the stock market has long been a dream of many people. Tales of the exploits of investors like Andre Meyer, Peter Lynch, Benjamin Graham, and Warren Buffett have wooed the public into thoughts of halcyon days and endless nights -all paid for via smart investment moves. However, as with all activities that we humans participate in or admire, there are always accompanying myths. This article will describe eleven such misnomers of investment.

Myth # 1: Investing is gambling. Actually, investing and gambling are very different matters, provided you follow a few basic precautions. Primarily, any company you are considering investing in should be well researched long before purchase. No one can do this with gambling. Oh, sure: you can buy books that tell you how to supposedly beat the odds at a given game. However, is there any book on gambling that tells you about a specific table at a specific casino that should be played at a specific time (or when a specific dealer is running the table)? No such book exists, and that is where gambling and investment part ways considerably: you can determine just how safe a specific company is at any given time.

Of course, with newly established companies, all bets are off, as they say. With untested companies, or those with less than 5 years as a public company (or a stock priced under $10), then maybe such investment truly is gambling.

Myth # 2: To invest successfully, you have to have to be "a rocket scientist" -that is, extremely intelligent. The truth: investing isn't rocket science. The average person is fully capable of investing in the stock market. In fact, many teens are now doing it with success and one of the world's richest men, Warren Buffett, purchased his first shares (of Cities Service) at the astonishing age of 11.

Myth # 3: You should have someone else manage your money. There was a time when this was true. However, the internet has completely annihilated such systems, allowing for the average person to invest for him or herself. Of course, you have got to educate yourself in the ways of stock investment. There are plenty of free courses online to choose from. Just an hour a week will allow you not only investment intelligence, but also freedom from high fees from the professionals.

A note about this, however. Some people simply aren't confident in pulling the trigger for themselves when it comes to any form of investment. If this is you, at very least, demand that your investment advisor explain his/her reasoning for each investment that is made -not for the sake of being overly scrutinizing, but so that you can learn about securities investing along the way.

Myth # 4: Despite the first 3 rules, day trading is a great and fast way to get rich. First, a definition of day trading: like it sounds, it means buying and selling securities on a daily or weekly basis, racking up trading fees and higher taxes, all the while hoping for big profits. Simply put, to be successful at this, you should be able to predict the future. It is much wiser to use Buffett's method of buy and hold (selling only when the company or stock has become a complete dog).

Myth # 5: Buying a stock when the price goes down is smart because you're getting a better price for it now than before, when it was higher. This is a greatly mistaken idea. Why? Because if the price has gone down, chances are, it will continue to fall, and your stock is now worth less than it was yesterday. The better route is to buy a stock which is going up. If you buy 100 shares at $53 today and it continues going up, say to $55 tomorrow. Were you to sell, you would have garnered a profit of $200. Not too shabby for a day's work (of course, be aware that this is a form of day trading and will cost you more greatly in taxes than if you were to hold the stock for a minimum of 365 days).

Myth # 6: By buying shares of a company, you're directly giving that company money. This is not necessarily true. Generally, a company makes its money from the initial sale or IPO, of its stocks. Unless you are an institutional investor who is purchasing tens of thousands of shares at this time, you probably won't even be able to purchase shares directly from a company. Rather, when you purchase stock, you are usually buying it from some individual (or financial institution) that owned it before you -not the company itself. This is important as there are many companies that people don't want to own a part of simply because they are repulsed by the nature of business that such companies deal in -such as the so-called "sin stocks" of tobacco, gambling, and alcohol. However, despite repulsion, the same investors are often desirous of owning such stock. With such knowledge, the moral conundrum can dissolve away.

Myth # 7: Hot tips are a great bet. This is one of the oldest and best known myths about investing, but as it's still so tossed around, it's worth mentioning. If your great-uncle, your sister, or even a parent tell you about a great stock, wonderful: that just gives you fodder to research. If, after you've exhaustively researched the company and it still proves to be wonderful -due to the numbers, not your emotional bond with your information benefactor, then by all means: buy it. However, if you're told you've got to buy it NOW, and don't have time to research the company and its charts, let it pass; it's surely not a sure thing.

Myth # 8: blue chip stocks never fail. While this is a wondrous rule of thumb, it is also potentially fictive. One word: Enron. Still not convinced? General Motors. At the time of this writing, GM's stock is feeling the effects of gravity as they continue to pull themselves out of the throes of bancruptcy.

Myth # 9: The majority of investors generally know what sells and what doesn't sell in the market. So, by following the pack, you are sure to make money. This is substantially false. While it is true that the conventional wisdom often dictates bull and bear markets, following trends can also be a fool's bet, leading straight to destitution. In fact, the contrarian bet is often the best one you can make (and when successful, can reap much greater rewards than those won by the pack).

Myth # 10: You can't time the market. This is one of the better myths as it bespeaks the idea, as mentioned in myth # 3 above, that no one can predict the future. However, there are almost always companies which are fundamentally strong and are selling for a price below their value. These companies can be found through diligent research (stock screens are a great start to such research). As the great Peter Lynch put it, research is "The crucial second step that many adult investors continue to omit." (p. 30, Beating the Street) By continually seeking out great companies, a good deal can be found at least once a month.

Myth # 11: Only the rich can invest in the stock market. This too was once somewhat true. That was back in the days when a person was almost always obliged to purchase shares in "blocks" of 100. However, those days are gone. Anyone can buy as little as a single share of a company. In fact, in cases like Berkshire Hathaway, Inc., a single share bought at the right time years ago would today make the owner quite rich.

This is but a few of the many, many myths about stock investment that we all come across on a regular basis. By diligently researching both the theories of share investment and in carefully researching individual companies, we can generally come out ahead. Good luck and great investing.


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