10 Stock Market Myths Exposed: Separating Fact from Fiction
Investing in the stock market can feel overwhelming, especially when you're bombarded with all sorts of advice, warnings, and persistent myths. These myths can cause unnecessary worry, discourage new investors from diving in, or lead experienced investors astray. In this article, we'll tackle 10 of the most common stock market myths and set the record straight, so you can approach investing with more confidence.
Myth 1: Investing in the Stock Market is Just Like Gambling
One of the most widespread myths about the stock market is that it's no different from gambling. After all, both involve putting money on the line with uncertain outcomes, right? But this comparison is a bit too simplistic.
The Reality:
While it’s true that both investing and gambling involve risk, they’re fundamentally different. Gambling is primarily about chance, and in many cases, the odds are stacked against you. The house usually wins, as they say. On the other hand, when you invest in the stock market, you’re buying a piece of a company. If that company grows and succeeds, your investment can increase in value over time.
Investing is more about strategy than luck. You can research companies, understand their business models, and make informed decisions based on data and trends. Sure, there’s risk involved—markets can be volatile, and companies can underperform—but over the long term, the stock market has historically delivered positive returns. Unlike gambling, where losses are almost inevitable in the long run, investing wisely can build wealth over time.
Myth 2: You Need to Be Rich to Invest in the Stock Market
Another common misconception is that you need to have a lot of money to get started in the stock market. This myth can be particularly discouraging for people who think they can't afford to invest.
The Reality:
You don't need to be rolling in cash to start investing. Thanks to online brokerages, fractional shares, and low-cost index funds, you can begin investing with just a small amount of money. Some platforms even allow you to buy fractional shares, so you can own a piece of high-priced stocks like Amazon or Google without having to buy a whole share.
Additionally, investing a little bit of money regularly—known as dollar-cost averaging—can help you build your portfolio over time without worrying too much about market timing. Even small, consistent investments can grow significantly over the years thanks to the power of compound interest. So, whether you have $100 or $10,000, you can start investing today.
Myth 3: The Stock Market is Too Complicated for the Average Person
The stock market can seem like an impenetrable world, full of jargon and complex concepts. This myth makes people think they need to be financial experts to invest successfully.
The Reality:
While the stock market can be complex, you don’t need to be a financial wizard to start investing. There are plenty of resources out there to help you understand the basics. And with the rise of user-friendly investing platforms, it’s easier than ever to get started. Many of these platforms offer educational tools, webinars, and even automated investing services that do the heavy lifting for you.
You don’t need to know everything about the stock market to be a successful investor. You can start with the basics, like understanding how to buy and sell stocks, what diversification means, and the difference between a stock and a bond. As you gain more experience, you can dive deeper into more advanced topics if you choose. But even with a basic understanding, you can make informed decisions and build a solid portfolio.
Myth 4: You Need to Time the Market to Be Successful
A lot of people believe that the key to making money in the stock market is to buy low and sell high—that is, timing the market perfectly. Although we believe that great traders can time the market better than average (either via technical analysis or other means of timing the market), it’s still a hard task that not everyone is interested in accomplishing. This myth can lead to stress and poor decision-making, as investors constantly try to predict the market’s next move.
The Reality:
While timing the market is not impossible, it’s still incredibly difficult, even for professional investors. The stock market is influenced by countless factors, many of which are generally unpredictable. If you’re not interested in trying to time the market, a better strategy is to focus on time in the market. Historically, the longer you stay invested, the better your chances of seeing positive returns, even through tough times, as you can see below. Keep in mind, though, that this historically applies to the broader US market and other broad markets. It doesn't necessarily mean that you should hold onto an individual stock that has become a loser fundamentally just because it had a good past (see myth #6).
Anyway, a reliable approach is to invest consistently over time, regardless of market conditions. This way, you benefit from dollar-cost averaging, which can reduce the impact of short-term market volatility. Rather than stressing over when to buy or sell, focus on building a diversified portfolio and sticking to your long-term investment plan.
Myth 5: You Should Only Invest in 'Safe' Stocks
Many people think that sticking to well-known, “safe” stocks is the best way to protect their money. While there’s some truth to the idea that established companies are less risky, this myth can prevent investors from exploring other opportunities.
The Reality:
While investing in well-known companies can provide stability, focusing exclusively on “safe” stocks might limit your potential returns. Diversification is key to a successful investment strategy, and that means including a mix of different types of stocks in your portfolio, including growth stocks, dividend stocks, and even some riskier investments.
By diversifying, you spread out your risk and increase your chances of capturing growth in various sectors. It’s important to remember that what’s “safe” for one investor might not be for another. Your risk tolerance, investment goals, and time horizon should all play a role in determining what’s right for your portfolio. Don’t let the fear of risk hold you back from exploring opportunities that might offer better returns.
Myth 6: A Stock's Past Performance is a Reliable Indicator of Its Future Success
It's easy to look at a stock that’s been performing well and assume it will continue to do so. This myth can lead to overconfidence in certain stocks and disappointment if they don’t keep up their previous pace.
The Reality:
Past performance is no guarantee of future results. The stock market is influenced by many factors, including economic conditions, changes in management, and industry trends. Just because a stock has done well in the past doesn’t mean it will continue to do so.
Real-Life Example: Nokia is a great example of this. In the late 1990s and early 2000s, Nokia (NOK) was the world's largest mobile phone manufacturer and a dominant player in the telecommunications industry. Its stock soared as it captured a huge share of the global market, and many investors believed that its success would continue indefinitely.
However, the rise of smartphones, particularly with the introduction of the iPhone in 2007, caught Nokia off guard. The company struggled to adapt to the new technology and consumer preferences. By the early 2010s, Nokia's market share had plummeted, and its stock price followed suit. Investors who assumed Nokia's past success would continue indefinitely were sorely disappointed, as NOK stock, which once traded at over $60, fell to below $5 by 2012. Check out its long-term stock chart below.
General Electric (GE) is another example of a company that saw a large decline. In a separate article, we highlighted how the company invested too much into buybacks instead of addressing its core problems.
Myth 7: The Stock Market is Only for Short-Term Gains
Some people believe that the stock market is all about quick wins—buying low and selling high in a short period to make fast profits. This myth can push investors to focus on short-term gains at the expense of long-term growth.
The Reality:
While some traders do focus on short-term gains, the stock market is also an excellent vehicle for long-term wealth building. Historically, the stock market has provided strong returns over the long run, even with periodic downturns. Long-term investing allows you to take advantage of compound interest, reinvest dividends, and ride out market volatility.
Many of the world's most successful investors, like Warren Buffett, have made their fortunes by holding investments for decades rather than chasing short-term gains. By focusing on the long-term, you give your investments time to grow and benefit from the market’s overall upward trajectory.
Myth 8: The Stock Market is Rigged Against Individual Investors
It’s easy to feel like the stock market is stacked in favor of big institutions and that individual investors can’t compete. This myth can lead to a sense of helplessness and discourage people from investing.
The Reality:
While it’s true that institutional investors have advantages, such as access to more resources and information, individual investors can still succeed in the stock market. Thanks to the internet and the rise of low-cost brokerages, individual investors now have access to a wealth of information, research tools, and investment opportunities that were once only available to professionals.
Moreover, individual investors often have the advantage of flexibility. They aren’t bound by the same regulations, mandates, or pressure to meet quarterly performance targets that institutions face. This allows individual investors to take a more patient, long-term approach to investing, which can be a significant advantage in the stock market.
Myth 9: It Takes Too Long to Build Wealth in the Stock Market
Some people believe that the stock market is a slow path to wealth, requiring decades to see significant returns. This myth can be discouraging, especially for those looking to grow their money more quickly.
The Reality:
While it's true that the stock market rewards patience and long-term investing, it doesn't mean you won't see progress along the way. The key is to have realistic expectations—building substantial wealth overnight is unlikely, but with consistent investing and a sound strategy, you can achieve significant growth over time.
The stock market has provided average annual returns of around 7-10% over the long term, which can compound significantly, even over shorter periods like 5 to 10 years. For example, if you invest $10,000 and it grows at an average annual rate of 8%, your investment could double in less than 10 years. While this isn't "get rich quick," it's certainly faster than many other investment options, and it’s a proven method for building wealth.
However, keep in mind that 7-10% is the average return. The reason that you’re on this website is because you want to learn more and be above average. Let’s say you’re able to beat the average by applying sound fundamental analysis to your investing and return 15% per year, which is not a completely unreasonable expectation. In that case, you’d turn an initial one-time $10,000 investment into over $163,000 after 20 years, or 16x your initial investment (calculated with our compound interest calculator tool here). And, of course, you could do better than 15% per year, although for most people, that can be challenging.
The idea that the stock market is too slow is often rooted in a misunderstanding of how compound interest works. Small, consistent returns can snowball into substantial gains over time, especially when you reinvest your earnings. It’s about finding the balance between patience and persistence—staying invested through market ups and downs while continuing to add to your portfolio regularly.
Myth 10: The Stock Market is Always Efficient
There's a widely held belief, especially among proponents of the Efficient Market Hypothesis (EMH), that the stock market is always efficient. This means that stock prices fully reflect all available information at any given time, making it impossible to consistently achieve higher returns than the overall market without taking on additional risk.
The Reality:
While the Efficient Market Hypothesis has its merits, the idea that the stock market is always efficient doesn't hold up in practice. Markets can be irrational and influenced by a variety of factors, including investor sentiment, behavioral biases, and short-term events that don't necessarily reflect the underlying fundamentals of a company.
For instance, during periods of market euphoria or panic, stock prices can become significantly overvalued or undervalued. Consider the Dot-Com Bubble of the late 1990s, when internet stocks soared to unsustainable levels based on hype rather than solid business models. Conversely, in the aftermath of the 2008 financial crisis, many stocks were undervalued as fear and uncertainty drove prices down far below their intrinsic values.
Moreover, even in less extreme times, inefficiencies can exist. Companies might be overlooked by the market, leading to mispricings that savvy investors can capitalize on. This is often the case with smaller, lesser-known stocks, which might not be as closely followed by analysts and can offer opportunities for those willing to do the research.
In essence, while the market can be efficient at times, it is not infallible. There are opportunities for investors to find undervalued or overvalued stocks, particularly if they take the time to conduct thorough research and avoid getting swept up in the emotional swings of the broader market.
Conclusion
The stock market is full of myths that can mislead investors and prevent them from making sound decisions. By debunking these common myths, we hope to have empowered you with a clearer understanding of how the stock market really works. Remember, successful investing doesn’t necessarily require perfect timing, vast wealth, or expert knowledge. It generally requires a long-term perspective, a willingness to learn, and the discipline to stick to your investment plan. Whether you’re just starting out or have been investing for years, keep these truths in mind, and you’ll be better equipped to navigate the world of investing with confidence.
