Investing in stocks is NOT the same as gambling

Investments made on the basis of half-knowledge always result in financial losses

A financial meltdown, a depressed business environment, a sudden fall in share market prices -- all these phenomena are a part of any economy.  These phases affect all those who are closely linked to the stock market. Such happenings give rise to an environment where myths are born.

Myths are commonly held beliefs which are in reality false. In the current context it refers to certain misconceptions about the stock market which can easily induce a newbie investor to act in a manner detriment to her/his interests.

Here, we debunk the stock market’s most popular myths.

Myth I: Investing is equivalent to gambling

Nothing can be further from truth. Investing and gambling are perhaps as similar in nature as a teetotaler and a drunkard. The foundation of investing is based on hard facts which are backed by research and data. Investing is about owning stocks which in turn means owning a part of the business.

A good performance by the organisation results in a reward for the investor, in the form of profit sharing. Since the market is in a state of constant flux and the business environments constantly change, stock prices move up and down.

The fundamentals of the organisation and its performance in the changing market condition are the index to the stocks resilience. In the long run the true worth will be reflected in its share price. Investing takes into account these factors in a systematic manner and is in absolute contrast to gambling which is a zero-sum game where one person’s loss is another’s gain.

Investing is about growth while gambling is unproductive.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the director and chief financial planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached atramalingam@holisticinvestment.in.

Myth II: Stock market is for researchers and institutional investors

There is a strong feeling among many people that stockbrokers are privileged to have a lot of well-researched information and so can predict the market turns accurately. This is an imprecise premise because market predictions are never entirely accurate and as far data regarding the market are concerned, the Internet has opened up a storehouse of information.

Individuals are in a better situation as compared to institutional investors who are under constant pressure to turn in profits in every quarter. An individual investor can think long term.

Short-term setbacks are likely to even out in the long run and thus provide more stability to the investment.

Myth III: Fallen angels will soar high again

The amateur investor is often influenced by the myth that any stock which is at its 52-week low is a good buy. Nothing can be more devastating than believing and implementing this notion. An old Wall Street adage is most appropriate in this context: Those who try to catch a falling knife only get hurt.

It is often seen that investors prefer to put their money in stocks which have fallen spectacularly over a period of time, instead of buying into those businesses whose fundamentals are strong but priced low. Shares of companies which have shown a stable performance over a period, say 52 weeks, but are priced at the same point as the one which has fallen sharply is definitely a better place to invest.

Buying a share at its low-point on the bare assumption that it will recover is not a healthy practice. This is different from value investing where the actual price of the share is trading below its intrinsic value and is expected to come good after market corrections occur.

Buying such stocks based on the expectation that it will once again touch its peak can clean out an investor off her/his entire holding.

Myth IV: Stocks which go up are bound to come down

The financial market is not driven by the laws of physics. What goes up might not be forced back by the gravitational pull. There are many stocks which has remained consistent over a period of time and has also been able to weather the recession.

If you are waiting for corrections in those stocks to buy at a lower rate, you will miss the current price and it may move up further and you may lose an opportunity.

Stock prices are a reflection of the company and it is always true that stocks undergo correction. However, it is important to scratch the surface and look beneath so that the investor has a fair idea about the standing of the company before arriving at a decision.

Myth V: A little knowledge is better than none

The proverb ‘Empty vessel sounds much’ is a relevant one in the context of the stock market. While it is true that something is better than nothing, half-knowledge can be more detrimental than helpful and so it is always advisable to be thorough about the subject before venturing into the market.

If there is a paucity of time and inclination, it is better to opt for an advisor who will ensure that the money is safe and the investment is right.

Conclusion

At the expense of sounding repetitive it is always better to be ‘safe than sorry’. What appears to be true may not be so. A half-baked cake might be mildly injurious to your health but investments made on the basis of half-knowledge can deal a body blow.