“Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.” – Warren Buffet.
The legendary investor was implying to getting your hands dirty in the stock markets. It essentially means diving deep instead of superficially scanning stock prices and news to make your investment decisions. You need to stay on top of your stocks if you want to avoid financial risks. In your mind, you may have averted all risks by following the prescribed rules. However, did you know that some of these widely held guidelines are actually only myths? Let’s bust some of these myths and understand reality.
- Follow your instincts
The stock market is one territory where you mustn’t play by your instincts. Your guts may have given you profits this far but it is a sure shot recipe to disaster in the stock market. The fact is that your instinct is most likely to follow the market sentiment. Would you invest in a bearish market or sell in a bullish environment? No, right. You are likely to follow what millions of other investors are doing. This is not the best way to make money.
Your investment must follow solid research and advisory. Going against the general sentiment requires good deal of courage. However, you will be making money when others would be burning their fingers.
- Stock market is risky
Some people blatantly compare stock market with gambling. While gambling is a play of luck, investing in the stock market requires knowledge and intellect. You need to understand your risk appetite and how to control it. You may lose money when the market falls but know that it always bounces back. You will not lose money if you don’t pull out from a tanking market. Every investor worth his salt will agree that stock market is for the long term.
- Large caps are the best investments
These stocks may seem low-risk but they require a huge investment. They have performed significantly well in the past and have higher market value. Investment in such stocks will take a longer time to give desirable returns. You may end up locking away your money for a good amount of time without making any real profits.
The worse is when you invest a considerable chunk in two or three companies. Nobody knows about the future and you may put yourself at a huge risk of tanking with the companies. Never place all your eggs in one basket. Diversify your investments to alleviate the risk.
- Invest in stocks that have done good in the past
Past performance is no indicator of a stock’s future performance. If that would be the case, everyone on the planet would be making big bucks. Management changes, socio-political environment changes and most of all, people change. These changes are likely to have an impact on companies as well. What was gold yesterday, may turn into ashes in the future.
The best way to move ahead is to study what had lead to the good performance in the past. How is the company dealing with the changing environment to stay ahead of its competitors. Diversify your investments to averse the associated risk.
- Stock market will give you quick money
Do not even think of investing in the stock market if you are looking for some quick bucks. For all you know, you will end up locking your money. Stock market rewards people who are in for the long term. Greedy investors pump in money when the market is soaring and pull out when the market is falling. They end up making huge losses. To gain substantial returns from the market, please know that only those investors earn profits who are in for the long haul.
- Invest in IPOs to make big bucks
Sure, there have been IPOs that gave immense returns to investors. They received unprecedented media coverage and popularized IPOs. But for all such IPOs, there have been many that drowned investors’ money. You need to analyses the stock valuation before investing in them. In bullish markets, IPOs can be highly priced to mirror the general positive sentiment. However, if the company doesn’t perform up to the mark, the stock will correct itself to the real value. You may end up losing money in this scenario.
Diversifying your portfolio, knowing the ways to control risk, an outlook to invest for the long term will help you to grow your money over time. Don’t follow the bandwagon blindly. Instead, have the confidence in your own research to stay ahead of the market.