9 Common Misconceptions About the Stock Market – Part 3

Plenty of people avoid the stock market because of misconceptions and unwarranted fears. Before passing up a great opportunity that the stock market offers, it is important that investors correct some of these flawed perceptions.

Here are the final three misconceptions in my three part series. Part one and two covered the first six stock market myths.

Misconception 7: It is impossible for me to beat the Index

The flawed theory that all stock market prices are efficient because of the Internet and easy access to information has led some investors to believe that active investing cannot reap plus-sized returns.

This is some way off the truth. Warren Buffett once said, “I’d be a bum on the street with a tin cup if the markets were always efficient.”

Active investors can comfortably beat the market because of the inevitable emotion of human beings and the inefficiency of the market pricing in business performance. Because of this, we can still find great long-term winners at discounts. These stocks can outperform the market index handsomely. If investors continue to invest with the right principles, and sound investment strategy, beating the index should be a reasonable goal to achieve.

Misconception 8: To achieve greater returns, I need to invest in riskier stocks

This could possibly be one of the biggest misconceptions in investing. Investors commonly believe that a riskier asset would provide greater returns over the long-term. However, this again is some way off from the truth about the stock market.

There are many less risky blue chip stocks that can easily outperform some of the riskier high growth stocks. While investing in new technology, high growth stocks can reap good returns; there are also great value stocks amongst the stable dividend-paying companies.

Misconception 9: Small cap stocks have more room for growth

It may make sense to an investor that a small company that is just starting out has a longer runway for growth. This could be by eating into existing market share or through disruptive technology.

But in reality, small cap stocks may, in fact, not outperform the market overall. This is because small companies have difficulties of their own. They have less financial muscle, a smaller customer base for vertical expansion and may have less expertise in their field.

It may be true that we can sometimes find gems in the world of small cap stocks but there are also a larger number of small cap companies that will underperform the market overall.

The Foolish bottom line

As investors, it is important that we fully understand our investments. Having no knowledge about something may, in fact, be better than believing a myth or having a misconception. This definitely applies to investing in stock market. To be better investors, we must identify our flawed assumptions before we can make better investment decisions in the future.

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.

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.