Stock Market Misconceptions

In India, many people still do not invest in stock markets due to various fears and misconceptions.In 1992, almost 10% of national savings were into stocks. 15 years later that percentage has dropped to 1-2%. There have been many reasons for that- Indians were not that well regulated, we had various stock market scams like the Harshad Mehta scam and the Ketan Parekh scam.People who have lost tons of money feel jittery about investing in stock markets.

Whenever I ask people to consider putting at least 5-10% of their savings into stocks, people look at me in surprise! On the other hand there are people who think making money in markets is easy till they take that “big loss’.

Here are various misconceptions people have about stock markets and stock price movements.

1. Stock markets are for gamblers

Ask a new investor to put his money into stocks and he will immediately tell you that he doesn’t believe in gambling!According to him stock markets are for gamblers and he can’t afford to play with his hard earned money. Any educated investor knows that by buying a “stock” of company, you are investing in the business and future earnings of that company. So one of the ways in which a man on the street can benefit economically from “India’s growth” is by investing his money in Indian companies that will bring about that growth.

Isn’t this a contradiction that many one of us strongly believe that in coming years India’s economy shall be one of the largest in the world but yet we feel shy of investing in Indian stock markets?

I feel our financial media has done a poor job of educating the masses.The media is too “short term focussed” and fails to convey the benefits of long term investing in stock markets. Ask an investor who put just 10000 in RIL in 1977 and is now sitting on a cool 1.3 crores.

2. Stock markets are for big players

If someone told me this statement 15 years back, I might have agreed with him. I feel last 10 years have been remarkable in empowering the “retail investor”. Technology has played an important role in making the systems transparent. With things like online trading and demat accounts, things have improved substantially.All the data and research tools that were earlier available only to institutional investors are now even available to retail investors.

Infact many times a smaller investors holds a “distinct” advantage over the bigger players.Two reasons for that- it is not easy for a big institution to buy or sell a stock without significantly affecting the stock price. Secondly, these institutions have to keep a “short term” focus because of how their performance is evaluated every month and every quarter. It is difficult for them to hold on to stocks that have prospects in slightly longer term! As a small investor,you do not have any such constraints.

3. Making money is easy with little knowledge

Some individual investors think that it is easy to make money without having adequate knowledge. They go through the daily newspaper,watch TV channels and then invest. Unfortunately, all these resources do not come to their rescue when an investor ends up putting good money after “bad ideas”. Thats why it is so important to have the right guidance and tools.If you do not understand “investing” ,then seeking professional help is not bad thing.Sometimes the costs of doing it all on your own can be quite expensive.

Always remember that while investing -”A little knowledge is a dangerous thing”.

4. I can double my money in couple of months

If you enter the markets thinking that you can double your money in 3-4 months, you are definitely doomed .This is one of the reasons why many investors buy “penny stocks” and end up losing money.Setting realistic return expectations is a key to success.

5. Let me buy stocks which are hitting new lows

People think that buying stocks which are falling is a good idea because “what goes down always come up” just like “what goes up always comes down” . We have already seen many stock ideas which continue to go “up and up” and some which continue to “go down and down”.