Some Common Myths Related To Stock Market Investments

The term ‘to invest’ is often misunderstood, especially when it comes to the stock market. As a stock market intermediary, I come across many clients who think of investments as something that can make them rich or earn high returns quickly.

The recent downfall in the stock market has made several people lose a lot of money, mostly due to lack of knowledge, patience and wrong choice of investments.

There are a few myths related to stock market investments that I would like to debunk:




Myth: Stock market is a lot of quick money

It is true that stock market investments can give amazing returns in a short time. However, it is only rare. Unless you know what the market doesn’t, you will have to do a lot of research about the economy, the industry and the company that you want to invest in and be patient for the market to value your pick.




Myth: Stock market investments require a lot of capital

You can start with as little as you want. A small amount every month would be ideal to begin with. Do NOT invest all your savings in the stock market. Determine your risk appetite. Stock market investments are only a part of your overall financial planning. Ideally, you should never invest more than 30% of your savings in the stock market.




Myth: Daily trading will increase your chances of making more money

Trading is speculation. If you trade (buy or sell shares) on a daily basis, you are speculating daily price movements. There is NO fool proof way to determine which way a stock would move on any particular day. All technical analysis and charts are only for guidance. Do NOT bet your hard earned money on mere historical patterns.

Trading is about making buy or sell decisions. The more decisions you make, the higher are your chances of going wrong. Trading might lead you to occasional profits, but it won’t make you wealthy. Warren Buffet didn’t trade his way up to riches.




Myth: Invest for the long term and forget

While investing for a longer term is recommended, you should follow the economy, industry and the particular company you are invested in closely.





Myth: Invest a huge amount at once to get maximum returns

The best way to minimise your risk is to invest gradually, in small quantities, over a period of time. Even a good stock can come down temporarily due to market perception. You can take advantage of temporary stock market corrections to buy stock at a lower price and ‘average’ out your purchase price. This way, you can even keep monitoring as well as evaluating your investments.





Myth: Use Futures and Options to hedge your positions

Only big corporations and HNI investors can truly hedge themselves with Futures and Options.
In India, we have a cash based settlement and not a delivery based settlement. Hence, hedging, in its truest sense is not possible. These instruments only help you to leverage your positions (and hence the risk). Small investors should STAY AWAY from trading in the futures market. More than 90% of all transactions even in the commodities market in India (where hedging and delivery based settlement is possible) are settled in cash.




As a basic rule:

Invest a major portion of your savings in fixed return investments like bank deposits, National savings certificates, Postal schemes and other such instruments.

Focus on your insurance needs. Life insurance and medical/health insurance are highly recommended. A major illness or any unfortunate emergency can hamper your entire financial planning unless you have sufficient insurance cover. Choosing the right insurance plan is also very important.

Invest a part of your savings in debt based mutual funds. They are relatively less risky compared to direct equity investments. You can even opt for hybrid debt-equity mutual funds for slightly higher returns, albeit with slight higher risk.

The remaining savings can be invested in the stock market either by buying equity shares directly or through pure equity based mutual funds. If you really have no knowledge at all about stocks and still want to invest, then mutual fund investments are recommended. Do some research on the internet to determine the best performing mutual funds in the past 3 to 5 years. To be on the safer side, invest in mutual funds that invest in blue chip companies.

If you do not have the time or expertise, it is always better to take the help of a professional and qualified investment advisor.