Equity investing requires research, patience and the appetite to absorb short-term volatilities. Moreover, you need to know the facts about the stock market to make the right investment decisions. Lack of complete knowledge leads to myths that prevent investors from unlocking the potential of equity investments.
Here are the top ten such common myths investing that you must overcome to invest in the best stocks:
Many risk-averse investors believe that the stock market is like gambling or making a bet. One wrong bet might wipe out their savings, so they avoid the gamble altogether.
Reality: The stock market is not a gamble if you do your research and diversify your investments in good-quality stocks. Moreover, portfolio managers exist, who research, analyse, and pick the right stocks for you. If you are risk-averse, you can use their services to find the right stocks.
Investors think they need a lot of money to invest in the stock market. If they have limited funds, the market is not the right place.
Reality: You don't need a lot of money to start your investing journey. You can start with a few stocks of a few companies. For instance, if you choose equity mutual funds, you can begin from Rs.500/month through SIPs. And slowly increase your portfolio as your savings increase.
Investors fear that they need to be professional analysts or experts who can read technical charts and graphs and deeply understand market trends to find the right stock.
Reality: Stock investing requires only a decent amount of research and study of the company that you invest in. To find the right stocks, read analyst recommendations and then dig into the companies' financial reports to understand their profitability. Pick stocks of profitable companies to invest in quality stocks.
Large-cap stocks are established stocks that have the resilience to withstand short-term volatilities. So, you might think that they are the best bet.
Reality: While large-cap stocks are safe and can generally deliver stable returns, they might limit the return potential. Usually, mid-cap and small-cap stocks have a high return potential and can prove to be an excellent addition to your portfolio. However, they also have a higher risk profile than large-cap stocks. So, assess your risk appetite and then invest in suitable stocks.
While a bullish or recovering market might give you immediate returns, being aware of short-term volatility is essential too.
Reality: It would help if you were patient with your investments to earn attractive returns. Rather than expecting quick bucks, create a quality portfolio based on your goals and investment strategy.
When the stock prices dip, many investors believe it presents a great investment opportunity.
Reality: You should find out the reason for the price dip. If the price of quality stocks falls due to a correction, you can buy such stocks at reduced rates and then benefit from the growth later. However, it is not wise if a company continuously makes losses or loses investor confidence. A harmful stock price dip is not an investment opportunity. So, research the price dip and invest in only quality stocks.
Many technical and fundamental strategies and charts are used in finding the right stocks. It is, thus, easy to believe that one needs a complex strategy for a successful portfolio and attractive returns.
Reality: While strategies should form a part of your investment approach, they shouldn't be dwelled upon too much. You also need the proper asset allocation as per your needs, the study of the company you are investing in, and the temperament to follow your strategy in volatile markets. Combine these, and you can increase your chances of creating a winning portfolio.
Past returns show how the stock has performed, and investors use these metrics to pick the stocks that have performed well in the past.
Reality: Past returns are no indicator of future returns because the stock prices change constantly depending on how the company is performing in the current economy. So, rather than relying on past returns, use other metrics like P/E ratio, return on equity, etc., to judge a stock's worth.
Many investors get lured in with hot tips asking them to invest in specific stocks believing that such information can be profitable.
Reality: The so-called quick, ‘hot’ tips about high-quality stocks may not always be well-researched. Moreover, what is ‘hot’ now might not be so in the future. Investing in stocks based solely on tips can be risky. So, rather than acting instinctively to convenient tips and word-of-mouth, do your independent research. If your study also backs the tip, you can consider the stock.
Investors believe in the myth that having too many stocks in their portfolios would diversify investment risks and give good returns.
Reality: While diversification across sectors and market capitalisation can mitigate risks, over-diversification is terrible. If you have too many stocks in your portfolio, the return potential would be diluted. If one or two stocks perform well, you might not be able to enjoy their returns if their quantity is limited due to an over-diversified portfolio. So, invest in a diverse mix of stocks but limit diversification.
Indeed, a little knowledge is dangerous when you invest in equity. So, bust these myths, know the accurate picture, and make the right investing decisions.
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