Don’t Fall for These Misconceptions About Stocks

The world of stock trading can see you earn big rewards, no doubt about it. But a lot of people get into it with a lot of dangerous misconceptions in their head.

If you want to start trading stocks, get these ideas out of your head now!

If it’s cheap, you may as well invest

When people enter the world of investing, it can be hard to know where to start. Your best bet is to start making smart decisions right away. Many people will equate “smart” with “not spending a lot of money”. (The opposite is true for some people, but we’ll be getting into that later.) Of course, I don’t want to tell you that you should avoid cheap stocks. Not blowing all your money at once is indeed a pretty smart move. But that doesn’t mean you should just go ahead and invest in any cheap stock that you see.

There’s this idea that because it doesn’t cost you much that you might as well make the investment. But you shouldn’t invest in a stock just because it’s cheap. You should do more research into the company offering the stock, every time. Don’t make an investment based on a small price. Base it on something like expanding market share. Find out more about researching market share at RPI.edu.

There’s got to be a limit to how far this stock can fall

So you’ve invested in some stock. The price was good; let’s say you paid $6 a share. After a few months, the stocks were worth $8.50. Nice! But, after a while, the value starts dropping. You hold on, thinking that it can’t drop below what you paid for it. But then it totally does just that, falling to $4 a share. You look at those notes you made while you were researching the company before you invested. You see that the lowest the stock has ever been is $2.50 a share. You panic a little less. Things can’t get that bad. But before you know it, the value drops to $2. Then it drops some more.

Don’t make the mistake of thinking that something can’t possibly get any worse. Let’s say the stock you purchased has lost 99% of its value. It can still go lower. There’s no reason, theoretically, that any stock out there can’t eventually fall to the dreaded zero.

You should avoid volatile stocks at all costs

Volatile. It’s a scary word, isn’t it? You may be tempted to give any stocks you see labelled as volatile a pass. It seems like the smart thing to do, right? But here’s something you need to remember: technically, pretty much all stocks are volatile. All that word means is that they’re liable to change suddenly, sometimes at any given moment.

Volatility in the investment world isn’t some label of doom. Volatile stocks usually lend themselves better to long-term investments than they do short-term ones. Unfortunately, the label of volatile leads to many misconceptions about particular types of stock. Penny stocks, for example, are labelled volatile. (They’re also often equated to scams, although this, in itself, a gross misconception.) But investors can actually find them very fruitful. If you want to read more about them, visit MoneyMorning.com.

Growth investing beats value investing every time

Growth. It’s a good word, isn’t it? It’s not like volatile. It’s probably one of the most comforting words in the worlds of finance and economics. (Obviously it’s not quite as comforting if we’re using the word in the medical domain…) This has led some people to claim, very confidently, that growth investing is always better than value investing.

Of course, someone who is new to the world of investing may find themselves a little confused at the moment. What are the differences between stocks leaning towards growth and stocks leaning towards value? You can read about this in much more detail over at Fidelity.com. For now, you should consider this: data recorded throughout 1926-2012 showed an annual return of 8.8% from growth stocks. Value stocks throughout the same period showed an annual return of 11%.

It’s easy

Many people think that the stock game is easy. After all, how hard could it possibly be? You just have a look at some NASDAQ data and find the companies with the really famous names. If you see the color green and a lot of numbers, then you just throw some money at those stocks. Wait for a little while, and boom. Soon enough, you’ll have so much money that you won’t know what to do with it.

Of course, you should probably ask yourself a very good question, here. If stock trading is so easy… then why isn’t everyone doing it? Well, let’s take at some trade statistics. It’s estimated that anywhere between 85-90% of stock traders end up losing money every year. And only an estimated 30% of companies will outperform themselves from one year to the next. So with that in mind, we can hardly call stock trading an easy exercise, can we? It can certainly be done; don’t lose faith in yourself. But it’s not as easy as some people would like to dismiss it as.

Cheap stock has more chance of doubling in value

When something doubles in value, that’s a pretty big deal. Let’s say there’s a company who is selling stock at $250 a share. Pretty hefty, no doubt about it. But if that stock were to double in value… well, let’s just say you’re making a good profit. But a $250 share doubling in value seems ridiculous. On the other hand, stock at $2 a share seems much more likely to double in value, right? Maybe it doesn’t seem like a lot at first. But if you buy a hundred of those shares and the value doubles, you’ll make $200 profit!

The mistake: it’s not any easier for a $2 stock to double in value than it is for a $250 stock. Because both instances require the same thing. And that’s the company’s entire market capitalization doubling in value. And big or small, that’s not something a company can do easily.