If you are looking to invest or get into share trading, then you may also be wondering how the stock market works. Despite stock trading and investing becoming more accessible and popular with retail traders, most people still cling to common myths and misconceptions. Here, we break down a few of those common myths and tell you the nuance and truth behind them, so you can be more effective when you trade or invest.
It is only exclusive to brokers and rich people
While this was mainly true in the past, since those who had the fund could hire experts to help trade and invest on their behalf, this is no longer the case now. Due to the advance of technology, it has made the stock market more accessible than ever before, with traders being able to buy and sell stocks online via their mobile phones, or through robo-advisors. In fact, anyone can technically make a trade with just a small amount of funds. Most data and research tools that were only previously available to brokerages can now be used by just about anyone. All in all, the stock market is becoming more transparent and inclusive than ever.
Stocks that go up must come down
Unfortunately, the laws of physics do not really apply to the stock market. Meaning that if you see a stock going up, it may not come down to the same price it once had. For instance, a stock price can sometimes continue to rise or remain constant over the years. That being said, sometimes stocks do undergo a correction. On the whole, though, a stock price is just a reflection of how the company is doing. If the company is run well and has a booming business, then it makes sense that its stock price will continue to rise.
A little knowledge is better than no knowledge
The general consensus is that knowing a little bit about something is better than knowing nothing at all. However, when it comes to the stock market and trading, it is vital that traders have a clear understanding of how it works and what they are doing with their funds. Generally speaking, investors and traders that have done their due diligence tend to be the ones to do well in the long term. That being said, some people may not have the time to thoroughly research how the stock market works, but still want to participate in the stock market anyways. As such, it would be unfair to gatekeep them from doing so. In this case, it would be best if they considered employing the services of a financial advisor or account manager. While these are hefty costs upfront, using these services will save you a lot of grief in the long run. It is also a hassle-free way to start share trading or investing without needing to constantly monitor how the markets are doing.
You can time the market
Despite what some tutorials, videos or experts will tell you, nobody can fully predict and time what the market is going to do. What most traders generally do instead is decide when to enter a trade and when to exit it. This is because the market can severely fluctuate, especially in response to economic or current events. So, instead of trying to time the market, traders should instead keep to their trading or investing strategies. Experts recommend that one should avoid getting wrapped up in the news cycle and let your strategies play out.
The more stocks in your portfolio, the more diversified it will be
While this saying is technically true to a certain extent, there needs to be nuance regarding it. Again, it all depends on how uncorrelated the stocks are to each other. For instance, uncorrelated stocks tend to move in opposite directions, while correlated stocks usually move up and down together. So if your portfolio only has high-growth tech stocks, not only are they all in the same industry, but they would likely move in the same direction with each other, so it is actually not very diversified. You would still technically be putting all your eggs in one basket because if the tech industry does not do well, it could severely affect how your portfolio is doing. The key to actually having a diversified portfolio is to pick financial instruments that are across multiple asset classes (so these can be stocks, bonds, mutual funds or more), and in other industries as well. So if any industry or a certain financial instrument is not doing so well, your other assets will make up for it.
Stocks that fall have to rise
Technically speaking, this is true, but it is not as simple as it would appear. While the market can drop and rebound, there are different levels of growth and decline. Most experts would categorise these levels into certain patterns. These include the accumulation, markup, distribution and downtrend.
- Accumulation: This phase happens after the stock market has reached rock bottom. This is also when innovators, investors, and early adopters begin to start buying stocks again, as they believe the worst is behind them.
- Markup: This phrase occurs when the stock market has been stable for a period of time. As such, stocks begin to start increasing in price.
- Distribution: This phase starts when there are more sellers in the market, and the stock has reached its peak.
- Downtrend: As its name suggests, this trend happens when stock prices start falling.
The stock market is the economy
Not true at all. Although the stock market and the economy have some kind of connection – as they generally tend to move in the same direction in the long run, they are actually two different things. The stock market is where investors and traders go to buy and sell stocks. The economy is defined as the relationship between consumption and production activities to decide how certain resources are assigned. While the stock market can help indicate how the economy is doing, it is only one indicator experts use. Additionally, the stock market is driven by what an investor feels, while the economy shows the wealth and resources regarding the production and consumption of goods. That being said, there is a symbiotic relationship between them. The stock market can impact the economy as it impacts the confidence of consumers, while economic conditions can also influence how the stock market is doing.