5 stock market myths to avoid

Nothing triggers the rumour mill quite like the stock market. Almost everyone has an opinion on it, or a story to tell. Over time, these individual experiences and snippets of information can snowball into fully-blown myths. While some may have been partially true 50, 30 or even 10 years ago… Many are no longer realistic today.

In this article, we’ll examine some of the most common myths out there today so you can choose which ones to kick them to the curb.

Myth 1: You need loads of money to invest  

As little as a decade ago, people needed tens of thousands of pounds to get a professional investment portfolio. In those days, investors would probably head to a physical bank branch or asset manager for a one-to-one meeting. From there, they would be advised about the most-suitable investment product.

Today, of course, with the rise of trading platforms and smartphone apps, things are completely different. Opening an investment account takes less than fifteen minutes and can be done from the sofa. Investors can start investing with as much or as little as they want.

Weirdly, the myth that you need lots of money to invest continues circulating worldwide. In the US and Japan for example, over 40% of people are missing out on investing because they wrongly think they don’t have enough money.

Just remember, that no matter how much you invest, your capital is at risk and your investments can go down as well as up.

Myth 2: Social media is good for investment advice

According to a 2021 study, 51% of UK investors use social media for investment advice. While this may be an interesting way to monitor trends, it should never be your main source of information.

Each investor has a unique financial aim and situation. Investment strategies should be carefully thought-out based on the risk tolerance and time horizon of the investor.

Ensure that your investments are well-researched across a range of different places, including broker sites, news outlets and key investor documents, as well as doing your own competitor analysis.

Capital at risk if you invest.

Myth 3: Only experts know how to invest properly

There’s a widely held myth that you need to be a finance whiz to invest well. A whopping 74% of people say they’d like to invest more if they had the right knowledge. But there are two ways to invest well without having a degree in finance.

The first is to do it yourself. Once you understand your risk tolerance and time horizon, you can read-up on the type of portfolio that would best suit your needs. With time and analysis, you can build your personal portfolio with affordable investment apps like Plum. But a word of warning – investing well takes research and patience, and you must always be aware of the risks.

The second way is more straightforward. You could go for a ready-made fund. Simply pick the fund or funds that best suit your needs, and you’re off.

Alternatively, you could do a blend of the two. By mixing funds, you can develop a core portfolio, while adding in some of your favourite stocks on the side (known as “satellite investments”).

Myth 4: All you need is crypto

Over the past years, floods of people – especially young adults – have dived into the world of crypto assets. The once-niche asset exploded into the mainstream. Today there are more than 19,000 types of cryptocurrency on the market, which are overwhelmingly owned by Millennials. As inflation bites and investors become increasingly tech-savvy, many are advocating that crypto assets and NFTs are great investments.

However, it’s not always the case and it’s important that crypto is only considered as part of a diversified portfolio. The UK’s Financial Conduct Authority is extremely concerned about young people plunging all their life savings into these assets. Before you invest, always research the asset closely. Remember that crypto-assets are not backed by anything – it’s not like a house or a stock where you own a house or part of a company.  Advisory companies often stress their golden rule, recommending putting no more than 5% of your investment portfolio into crypto.

Note: Crypto is a high-risk investment and by investing, you could lose all your money.

Myth 5: Investing is scary and confusing … it’s basically gambling!

54% of people don’t invest because they find the process scary, while 40% avoid the stock market because they think it will be confusing. For many, this probably comes down to a fear of losing their hard-earned savings on something they don’t fully understand. After all, in a recession, it’s natural to be cautious.

Some people even think the stock market is like gambling. But a good investment strategy has nothing to do with gambling. This is because when you invest your money into a stock, it (usually) goes towards a company who uses it to grow.

When a company does well, it can expand to more places, make better things for customers, employ more people and create returns for shareholders. By contrast, when you gamble, someone wins and someone loses. No further wealth is created.

One way that investing may seem like gambling is when people do not do enough research before buying into a company. Some people are now using apps irresponsibly to day-trade with little or no understanding what they’re doing. To avoid making this mistake: analyse your investments properly, avoid investing for less than five years and never buy stocks that you can’t afford.

How can you dispel more stock market myths?

There are many more stock market myths out there. Some people believe that falling stocks will bounce upwards again. This is a dangerous bias. In Wall Street, it’s known as “catching a falling knife”. Others will advocate the opposite, saying that rising stocks will always fall back down. None of these myths are rules. They are just superstitions or assumptions.

Incredible numbers of people will just follow the herd, and invest in the same way as everyone else. This is known as “herd mentality”, and it’s a quick way to lose a lot of money. When stories circulate that cause investors to buy or sell, it’s known as “market noise”.

As an investor the only true way to dispel a market myth is to do your own research. Don’t accept investment advice at face value. Analyse the company well, read as much as you can, scrutinise the financials, read-up on the board members, compare with competitors, follow trends and regulations in the news. Dispelling myths and thinking for yourself is a big part of becoming a successful investor.

If you’d like to read more about how the stock market works, explore our Investment blogs.

Please remember that, as with all investing, your capital is at risk. You shouldn’t invest in or deal in any financial product unless you fully understand it and the inherent risks. If you automate and invest you should be satisfied your choices are suitable in light of your circumstances and position.

The information contained in this article is for general informational purposes only and is not intended to constitute investment advice or any other advice or recommendation. The information provided should be used at your own risk and it is your responsibility to evaluate the accuracy, reliability, timeliness and completeness of any information available on a linked website.