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9 Common Misconceptions About the Stock Market – Part 2

Last year, the Straits Times reported that Singaporeans had unrealistic expectations about investing. Worryingly, millennials, in particular, had more misplaced assumptions about the stock market. They were also more likely to be overconfident about their investment abilities. These misconceptions can lead to flawed investment strategies or even financial disaster for some.

In light of this, I have decided to write on nine common misconceptions about the stock market. This is the second part of the three-part series, and the first can be found here.

Misconception 4: I need to learn to read charts and predict short-term price movements

Many new investors might have heard about day trading and think that investing in the stock market is a lot like that. This can lead to the assumption that to be good at investing, we too need to be able to read stock charts and be able to guess which way the price of a stock is heading in the near term.

Thankfully, this is nowhere near the truth. Long-term investors can take heed that to benefit from the stock market in the long-term, we need not worry about “supports”, “resistance” or any other short-term “price patterns”. What we do need to know, though, is that our investments are based on the profitability of a company. By finding great companies at reasonable prices, we are more than likely to profit over the long-term.

Misconception 5: A few months is enough to see the rewards of my investments

When it comes to investing in the stock market, investors need to realise that time is their friend. Warren Buffett famously said, “Time is a friend of the wonderful business, the enemy of the mediocre.”

We should look for companies that can grow over time and hope to hold on to these investments indefinitely. Investors who hope to earn money by moving in and out of the stock market every few months would be hard pressed to earn plus-sized returns due to the increased frictional costs and unpredictable short-term volatility of the stock market.

Misconception 6: The stock market is an easy way to get rich quick

Last year, when surveyed, investors said that they expected a minimum of 9.6% returns per year. This may be achievable for some but for many, this is an unrealistic target to set. For reference, Singapore’s benchmark index, the Straits Times Index (SGX: ^STI), returned 7.8% per year since its inception, some way short of investors expected returns.

Stocks are possibly one of the best performing asset classes to invest in. Despite this, if we invest with the mentality that we are going to get rich quick, we may end up making rash investment decisions, which will lead to losses down the road.

The Foolish bottom line

Misconceptions about the stock market can be devastating to an investor. Millennials, in particular, have more flawed assumptions about the stock market than their older counterparts. As investors, we need to correct these stock market myths and educate ourselves properly about the stock market. If not, these assumptions can lead to huge losses for the misinformed investor.

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.