An Expensive Lottery for the Elect: Explaining 6 Myths about Trading at the Stock Exchange

There are many myths and fears associated with trading on the stock exchange. We’ve tackled seven of the most common ones – and explained the validity of each stereotype.

6 Myths about Trading at the Stock Exchange

1. Trading at the stock exchange is like gambling at a casino

Many people are convinced that stock trading has little to do with rationality and that investing is more like gambling. This is far from the case.

In the short term, of course, the value of stocks on the stock exchange can change irrationally. But if we talk about the long term – for example, starting from one year – a company with a well-run business cannot go negative for a long time. And if negative events shake the quotations for a certain period, more often than not, the firmly established issuers find a way to return to growth.

In other words, in many cases, it is possible to predict the dynamics of a company’s shares on the market. To do so, however, you will have to carefully study a company’s operations and its entire business model. It has little to do with the world of gambling, where everything is decided by chance.

A certain element of similarity is that the outcome of investments is not known in advance. Plus, riskier investments can turn out to be more profitable as well as more unprofitable. But buying securities is a transaction with a non-zero result. You buy securities of operating companies, the company makes a profit, which means that sooner or later the investor will be able to count on profit. At least in the form of dividends.

The verdict: not true. The stock market has its own patterns

2. There is nothing complicated about trading

There is an opinion that in order to trade at the exchange, it is enough to conclude a contract with a brokerage company – and go ahead, you can trade. Technically it is so, but in practice, such an attitude can be dangerous.

The exchange requires a responsible approach.

If you decided to trade on the exchange, you have to be ready to study not only the technical side of the stock markets.

For example, you have to delve into multi-page financial reports in order to understand the state of affairs of this or that company, study markets, be interested in economics. In other words, investors will have to put some thought into it.

The usual contract with a brokerage company implies that you make all decisions on operations at the exchange. Overconfidence or lack of basic knowledge will lead to bad decisions and loss of money.

That’s why in the first stages you may need a consultant, which can be provided by brokerage companies. This will require additional funds, but the losses from illiterate decisions can hit your capital much harder.

The verdict: 50/50. There are difficulties, but they are surmountable.

3. Only professionals trade.

Another myth arises from the previous one: if you’re not an expert, it’s better not to go to the exchange market at all. Trading the stock market does require knowledge – but all that knowledge is available.

You don’t need an economics or math degree. Everyone becomes an investor: students, housewives, engineers, doctors – anyone. To immerse yourself in the subject, it is worth reading thematic blogs, websites devoted to investments and exchanges, and books for those who are just going to trade in the stock market, all of which are available on the Internet in sufficient quantity to gain basic knowledge.

Especially diligent people can sign up for online courses. All of this combined will help you figure out how to extract the essentials from financial statements.

The verdict: 50/50. Non-professionals are able to make money on the stock exchange.

 Stock Exchange

4. The best way to buy stocks that have fallen in value

The myth that falling stocks can be considered a good investment is widespread. On the one hand, it is true, but there are subtleties.

In order to make money on a declining stock, an investor must have a reasonable belief that the price will rise over time. And an understanding of why it is falling at the moment.

A good example is Kraft Heinz. Back in 2017, shares of this ketchup maker were worth more than $95. But due to an ill-conceived development strategy, the securities began to plummet in price. The company simply could not keep up with trends in the food market and was quickly losing market share.

In 2017, Kraft Heinz stock began to decline and continues to do so to this day. Kraft Heinz stock today is valued at a modest $25. If you examine the company’s situation, it’s clear: Buying its stock is a bad idea. No one can predict right now whether Kraft Heinz will pull out of the downturn.

The verdict is 50/50. Much depends on the specifics of the business.

5. You can only make money on the growth of stocks

The usual system of making money on the stock market, in the eyes of beginners: buy a stock when it is cheap and sell it when it rises. In fact, this is only one way.

It is possible, for example, to steadily receive dividends and not to think about the value of the stock at all.

Or you can make a profit on a decline in the value of securities. Such a strategy is referred to as a short position. Its essence is as follows. You expect the stock of a company to fall in value over time. You don’t own the stock and there is no point in buying it yourself since it will soon go down in value. But you can borrow them from a broker.

The broker allows you to sell the shares for a certain amount. At the time of the sale, the money in your account is reduced by the amount of shares sold. That is, the broker sort of lends you the paper, selling it for you against your money.

After a certain period of time, you must return the securities to the broker, buying them on the market. If your prediction comes true, you buy the stock cheaper than you sold it earlier. The broker will get his securities back, and you will have money in your account. If the downside plan worked, the money will return to your account with a profit.

The verdict: not true. There’s money to be made on declining stocks, too

6. Brokers will cheat me

Supervision on the part of special bodies and quite transparent system of broker’s accountability to the client practically leave no room for cheating. Of course, behind a signboard of a brokerage company there may be swindlers, but you can recognize them by a set of simple signs.

A broker must have a license and the company for which the broker works must be registered. Also, a broker has no right to promise an exact percentage of profit – if he does, then something is wrong.
And one more thing to clarify: a qualified broker is interested in his clients’ profit. After all, the more you earn on the shares, the higher the commission the broker can claim.

The verdict: it depends on the broker. You should check the company’s reputation before trading.

Kevin Doran

I have been trading forex since 2015. Over the past few years, I have tried and tested all the most popular Forex Brokers. I publish my reviews to help you choose a reliable broker and reduce your risks.

Rate author