Retail investors often lose money in the stock market.
This is largely due to misinformation which often lead to misconceptions which may result in common investment mistakes like:
- Buying too high and selling too low
- Follow blindly market rumors
- Getting misled by self proclaimed gurus
- Making buy/sell decisions based on gut feel
So what are the most common myths and misconceptions that cause retail investors to lose money.
I can beat the pros in the market
John, a first time investor is considering investing some spare money into a Singapore focused unit trust. However, upon hearing his friend brag about how he made a killing by trading stocks, he starts to have second thoughts. Through a simple conversation with his friend, he develops a false impression that the market is very easy to beat. But little does John know that beating the market is extremely difficult even for a professional investor. In reality, his friend might have just gotten lucky!
I must trade frequently to make money
It is a myth that when the market is trending, you should trade, trade, and trade. But the truth is, when you frequently, the real winner is your brokerage, because you’ll be paying them a commission every time you make a trade. Rather than try to catch a series of 10 – 20% upticks, its often better to focus on capturing a few big upswings. This will help you save on transaction costs. Alternatively, you can practice value investing which means buying in undervalued stocks and holding them for long term gains. After all, this is what Warren Buffet, one of the most successful investors in the world, advocates.
Stock analysis is for Analysts only. I just buy what’s hot!
Many retail investors choose to buy what their friends or brokers recommend without sitting to analyze the company fundamentals. This behavior is extremely risky and similar to gambling because it depends largely on luck.
As a rule of thumb, if you want to invest in shares, get to know your companies first before investing in them. This requires a thorough reading of the company’s annual reports. To interpret the numbers on the annual reports correctly, a basic knowledge in accounting is needed. Having the ability to pick potential stock winners based on numbers rather hearsay, will greatly improve your chances of making better investment decisions.
Dividends are not important
Many people think that dividends do not matter much, but they do. A well constructed portfolio of stocks should yield you more than a fixed deposit, with an upside potential as a bonus. To summarize, a high quality stock portfolio is likely to give you healthy and increasing dividends, as well as build the value of your capital.
In this article, we’ve talked about some common myths and misconceptions in stock investments. Next week, we shall cover the most common myths and misconceptions in unit trust investment. So stay tuned.
