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9 Common Misconceptions About the Stock Market – Part 1

Photo credit: Rafael Matsunaga. Licence: http://creativecommons.org/licenses/by/2.0/

People who are new to investing commonly make assumptions about the stock markets based on hearsay or “advice” passed down by their elders. Many of these misconceptions may also arise from “scary” anecdotal stories from a friend or family member. This can lead to new investors staying away from stocks due to unwarranted fears.

In light of this, I have decided that now might be a good time to share nine common misconceptions that new investors may have about the stock market. I have split this into a three-part series.

Misconception 1: The stock market is like gambling

This is probably one of the greatest myths of the stock market. Unfortunately, it may also be one of the most widely believed misconceptions. The stock market may be unpredictable in the short term. But in the longer term, unlike gambling, it is easy to gauge the overall direction of the stock market, and that is – up.

The S&P500, a widely used index representing some of the biggest companies in America, has returned approximately 9% per annum since its inception. Likewise, Singapore’s benchmark index the Straits Times Index (SGX: ^STI) has returned an impressive 7.8% since its inception in 1987.

This is by no means because of chance or luck. Stocks tend to do well over the long-term because its value is based on the company behind the counter. Hence, if a company does well, so too does its underlying stock. Over the years, companies have grown significantly due to population growth, improving technology and research. This is unlikely to change; hence we can quite certainly maintain that stocks will continue to appreciate in the future as well.

Misconception 2: I need to be a mathematic genius to invest in the stock market

“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.” – Warren Buffett

Sometimes new investors may be fooled (with a small “f”) into thinking that the stock market is only for people who are champions at mathematics. This can be due to the unending amount of numbers that we need to take note of or the complicated financial statements that accompany annual reports.

However, this could not be further from the truth. We do not need that much financial suaveness or appreciation for numbers to be able to reap positive returns in the stock market.

Legendary investor, Peter Lynch, believed that anyone could earn from the stock market. Even without a knack for numbers, retail investors can find stocks that outperform over the long-term. This can be easily achieved just by concentrating on a few important metrics and with the right investment philosophy.

Misconception 3: I need a lot of money to invest in the stock market

Another great myth about the stock market is that only the rich can invest in it. In reality, the stock market is one of the best ways to invest your money if you only have a limited capital. This is because the frictional cost of investing in stocks and the required paid up capital is low compared to other assets.

This is even more so in the era of the Internet. The online brokerage platforms charge even lower fees than the traditional brokers. Singapore’s new ruling of a minimum purchase of 100 units, reduced from 1000, has also made the stock market even more accessible to investors.

The Foolish bottom line

Millennials in Asia are staying away from the stock market, preferring instead to invest in property or to hold cash. This is due in some part to the common misconceptions about stocks as an investment. If millennials are to achieve better returns, they need to familiarise themselves with all the possible investment opportunities out there and to correct their false beliefs about the stock market.

Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.