Rules and regulations are a part of the stock market, and there are also misconceptions about what you can do within the stock market and how you can get “rich.” Insider trading on the stock market has the reputation of being exciting, but is it legal? Martha Stewart found out that insider trading could land you in prison.
Another misconception claims you can purchase stocks and fall into mind-boggling riches. Amazon went public on May 15, 1997, at the IPO price of $18.00 a share. If you had bought stock in Amazon in 1997, your $18.00 per share would result in millions. Amazon is a win-win.
However, with the pandemic spiraling out of control, you would think medical stocks are where to invest. Ventas (VTR$1.79), a real estate investment trust specializing in senior living facilities and medical office buildings, is a stock to avoid. Following trends and anticipated growth is not always a good idea when dealing with stocks.
Other misconceptions include:
- The stock market works like the economy. When the economy is down, it is thought that the stock market should also be down. Not so. Stock markets are forward-looking; they do not consider today but look to what will happen in the future. Stock markets often rise during a recession since investors are looking toward the future and believing in a recovery.
- Day trading is a great way to make money. There are no statistics that support the success of day trading. Most investors in day trading lose money because trades are based on emotion. Day traders quit their jobs to day trade and generate money to replace their salary. However, day trading is risky. Investors want to prove they are right and refuse to sell a losing trade or hold losses long.
- The stock market is gambling. When you gamble, you lose your money straight away. If you invest in the stock market and purchase a non-performing stock, you could lose your investment in one day. But, if an investor is conservative, they study, do their due diligence, have patience, and invest in stable companies, they could come out ahead. Gamblers have no control over risk levels; stock traders do.
- Buy a stock that is falling. One huge misconception in the stock mark belies that buying a falling stock is good. The stock will eventually go up. This misconception believes that falling stock will go up. They may, and they may not. You are better off studying, researching, and purchasing stocks that are slowly rising.
- It is not true that stock prices will always revert and move back up. However, a company that is decreasing in earnings may be on the verge of bankruptcy. Look at the history, follow economic trends, study a company, and if you find they have steadily lost money, step away from their stocks.
- Income investors should invest in high yielding stocks. Investors should not simply buy a stock because it pays a good dividend. If an investor looks further into the stock and the company, they will find that income dividend stocks do not outperform growth stocks.
Growth stocks do not pay dividends when the company is new because brand-new companies hold back funds to reinvest and grow the business. However, growth stocks eventually increase dividends, and investors benefit from being patient and watching. Growth investors make much more when waiting for increasing dividends and watching for capital returns.
Income stocks or those stocks that pay dividends generally keep payments consistent or employee a lower dividend payout.
There is no misconception that markets are dragged down by uncertainty. The recent weeks of waiting for a coronavirus breakthrough and the political climate to calm down has caused the stock market to plunge. However, the S&P 500 stock index rose after Pfizer announced the certain release of a vaccine. This news came on the heels that a new president was elected. The specter of political unrest was steadied, and the stock market took a deep breath. Investors ran to buy stocks and place bullish bets on a hopeful return to normal life and a reviving economy.
Markets across the globe also saw significant gains. The Dow Jones industrial average jumped by three percent, Japan’s Nikkei 225 was up two percent, and China’s CSI 300 grew by nearly two percent.