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Top 12 myths about investing in stock market and how to overcome them

Investing in the stock marketis a risky affair, especially when you are a beginner. The uncertainty of its movement has surprised even market pundits and experts at regular intervals.  Along with the risks, there are many myths too which confuse investors and hit their returns. Today, we take a look at ten of them and  how they can be overcome for earning more returns in the market.

Deepak Jasani | May 7, 2018 | Updated 09:47 IST
Top 12 myths about investing in stock market and how to overcome them

 

Investing in the stock marketis a risky affair, especially when you are a beginner. The uncertainty of its movement has surprised even market pundits and experts at regular intervals.  Along with the risks, there are many myths too which confuse investors and hit their returns. Today, we take a look at ten of them and  how they can be overcome for earning more returns in the market.

You Need a Lot of Money to Invest

You need money to make money investing, that much is true. But you don't need a lot of money. The best example is starting an equity mutual fund SIP with as little as Rs 500 per month. Most mutual funds have a minimum Lumpsum investment of just Rs 5,000.

Investing is too Risky

A lot of people shy from investing because they mistakenly think it's like gambling. Sure, investing in a single asset is very risky. But investing in the broad market, over years, has pretty good odds. That being said, there is some risk in investing. And some investments are riskier than others. Technically, yes, the market could tank and all of your assets could completely drop in value. But as long as you don't sell when it tanks, history has proven you'll bounce back and most likely hit that average return if you're invested properly. The market always cycles, it's filled with highs and lows.

More people have made money in the equity markets by focusing on risk than by focusing on returns. Once you learn to control and measure your risks your returns in the markets will automatically follow. It does not matter whether you are a small trader or a billionaire trader; you will effectively have to trade with finite capital. As long as capital is finite, the core challenge is to manage your risk.

It's different this time

This is the very common statement which everyone starts saying whenever market corrects from its high. The fact of the matter is that one can never tell with confidence whether it is just a correction or the beginning of a prolonged bear market. Instead of trying to make sense of every market movement, an investor should focus on buying a good business at a reasonable price.

This stock is down 90%, how much it can fall more

This is one of the common mistakes made by certain investors. Say XYZ company which was priced at Rs 200 few months back, is currently quoting at Rs 10. Suppose you bought 100 shares at Rs 10 and since the stock has already corrected 90% so you may think that the only risk is Rs 10 per share. But say in a month's time, it came down to Rs 2. In absolute terms, it's just a loss of Rs 8 but in relative sense, you have already lost 80 % of your capital.

Investors with low risk appetite should stay away from such trades. There are plenty of good companies with stable business where you can invest your money. And if you still want to speculate, put only that much money in such stocks which you can live without. So even if it becomes zero, your financial condition is not affected.

You have to be a genius to make money in the stock market, I am too young/old to invest

These are some of the inferiority complexes faced by a lot of first time investors. You do not have to be a genius to invest and earn from equities. You only have to be as reasonable as possible. That entails, first and foremost, a strong control on your emotions.

Investing into companies with strong, growing businesses, competent and transparent management and steady cash flows and not investing at expensive valuations is the reasonable way of investing. A reasonable person can be young or old. Age has got nothing to do with it. It's all in the mind.

IPO means quick and sure money

For every Dmart IPO there are 10 other IPOs that end up losing money on listing or get listed at par price. When a bumper listing like Dmart gets a lot of media attention, investors tend to expect a similar kind of return from all initial offering. This more often than not turns into a money trap. The decision to invest in IPOs should be based on some fundamental analysis of the business and more importantly on the valuation at which the stock is being offered.

IPOs become a rage during bull markets and merchant bankers set steep valuations in such a scenario since they believe that the positive sentiment will help attract money even at high valuations. In such a case, the investor ends up paying much more than he should have for the stock. If the company is not able to then deliver results in line with the heightened expectations, the stock price corrects to reflect the reasonable valuation resulting in a loss.

This stock is a multibagger. Let's borrow money to buy more of it

Stock market investors are not given loans easily by banks, NBFCs or unorganized lenders because it is considered very risky and most of them stay away from it. Hence, it is the stockbrokers that provide loans to such investors. In India, there are a few ways of doing it, namely Margin Funding and Loan Against Shares (LAS). In margin funding, you can buy 2x of your capital, which means that the investor will contribute 50% and the other 50% will be funded by the stockbroker.

Stock markets are generally more volatile than other asset classes. Hence, if you invest using borrowed money, the price can go against you. In the event that things don't turn out the way you expected, your losses will multiply depending upon how much you have leveraged. For instance, if you borrowed and invested 2x in a stock and instead of going up, the stock price fell by 20%, then your loss would be 40% plus interest and transaction costs. Leverage is a double-edged sword and it must be handled carefully.

Large cap stocks are sure bets

While companies with a long track record and an established business make for attractive investments, they may not turn out to be fast appreciating stocks. One of the reasons is that these stocks have already given a decent return in the past and have a higher base. Secondly, such stocks are widely covered by a number of analysts. As a result, the ability to generate excess returns is severely limited.

If the stock has done well in the past, it must do well in the future too...

Examples of Sun Pharma pop up in the mind in this context. Investors who bet on this company 3 years back have ended up losing money. Warren Buffet used to occasionally joke that if the past was what the market was all about, then librarians and archaeologists would be the wealthiest people in the world.

Stock markets can earn me quick bucks

Stock market will reward the long term investors. Stock market is a system which transfers money from investors who are fearful and greedy to the investors who are balanced and rational.

There is no such thing as too much diversification

Diversification is needed. A well-diversified portfolio can be created with 10 stocks or three mutual funds. Having more than 20 stocks or six mutual funds can dilute your returns. The reason is you are not only investing in best stocks and funds, you are investing in above average and average stocks and funds.

The best way to make money is investing in what is hot

If you are investing in what is hot, then you are following the crowd. If you follow the crowd, you will get what others are getting. You will not get anything more.

Deepak Jasani is Head, retail research at HDFC Securities

 

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