Busting Myths Surrounding Trading in Shares 

Five myths about investing in the stock market that may be keeping you from building wealth

 

Myth #1: Investing via the stock market equates to gambling 

This first myth resonates strongly with me, as the reality of investing in shares is most certainly not akin to gambling. To understand why, we need to consider what investing in shares means. 

The concept of ‘buying a share’ may be more readily understood if we were to add a little more detail to that phrase, and instead express it as ‘buying a share (or portion) of a company’. When an investor buys a share, it therefore represents fractional ownership of a company. This entitles the shareholder to a claim on the assets of that company as well as a fraction of the profits that the company generates in the form of dividends. Many who believe that investing in shares equates to gambling do so because they think of shares simply as a trading vehicle, and don’t recognise that an investment in a share represents ownership in a company. 

Investing and generating wealth should not be confused with the zero-sum game of gambling, as gambling merely takes money from many and redistributes it to a few. No value is ever created. With investments, on the other hand, the overall wealth of an economy increases. This growth is reflected in companies’ share prices which investors benefit from if they hold shares for the long term. 

Benjamin Graham, the father of value investing, rightly said that a market is a voting machine (gambling) in the short term, but a weighing machine in the long run. And investing is an endeavour for the long run. 

Myth #2: You can time the market 

Timing the market is the idea that wealth can be created by predicting the right time to buy and sell. Whilst seemingly a sound idea in theory, it is a complete myth in practice as nobody truly knows exactly what the market is going to do. Research shows that the cost of waiting for the perfect moment to invest typically exceeds the benefit of even the most perfect timing. 

The best strategy is therefore not to try and time the market, but rather to define your investment plan and invest as soon as possible. If you don't have the opportunity to invest your funds all at once, or you feel the risk of doing so is too high, consider investing smaller amounts more frequently. Sticking to this approach can offer several benefits, including: 

• rand-cost averaging, 
• preventing procrastination, 
• minimising regret, and 
• avoiding market timing. 

Myth #3: You need a lot of money to start investing 

There is a prevalent perception that investing in the stock market is a playground for investment banks, asset managers and ultra-high-net-worth clients, but this is certainly not the case. During the 1990s, the internet opened the market up to retail investors, and retail brokerage houses provided cost-effective market access that made it easier for these investors to invest in the stock market. 

The best way to start investing in the stock market is to start contributing monthly amounts to a retirement plan. Your financial adviser can help you open a retirement annuity, which is effectively a personal retirement product. Shares are typically one of the main underlying asset classes making up a retirement annuity. 

Myth #4: Buy low, sell high 

This myth is linked to the idea of timing the market and is one of the most common investment myths among those who are yet to start investing in the stock market. This inexperienced viewpoint says that you just need to buy when the price is low and wait to sell it when it reaches a higher price. Even experienced investors battle with this however, and even if you find a stock with a low price, deciding when to sell is challenging. 

Myth #5: The younger you are, the more risk you can take 

Younger investors tend to think about taking high risks to make extraordinary profits. Although younger investors have longer investment time horizons, one should not fall for highly risky investments in pursuit of high profits. 

Warren Buffett’s two investment rules: 

• Rule No.1: Never lose money. 
• Rule No.2: Never forget about Rule No.1. 

Conclusion 

Now that the trading myths have been busted, why not approach your financial adviser and agree on a plan to start investing now? Invest for the long term to give yourself the best chance of benefiting from having exposure to shares – both from a capital gain and recurring dividend income perspective.