Five stockmarket myths busted
There are a lot of misconceptions about the stockmarket. Myths and false wisdom abound. In this article we plan to bust some of these myths and guide readers toward a more common-sense approach.
Myth No. 1: The stockmarket is comparatively risky
Let's face it, every investment carries risk. Even parking your money in government bonds carries risk. Stocks can be risky but the problem is not in the stocks themselves, it is in the process that people go through when choosing a stock.
Let's take an example. If you plan to purchase a property, you would most likely do your homework on the suburb, the street, the neighbourhood, recent prices and the quality of the house or apartment. When it comes to stock investing, first-time investors don't put in the same level of homework.
They jump into the market without checking each aspect of the business. This often leads to loss and the myth that the stockmarket is overly risky. Imagine buying a property that you have never researched, tested or analysed. You probably wouldn't do it. Likewise you shouldn't do this with a stock.
Myth No. 2: The stock market is manipulated
There is a growing sense in the investment community that the stockmarket is controlled by a bunch of investment banks such as Goldman Sachs and JP Morgan.
While it's true that these organisations do have impact on many markets purely because of their size and influence, it isn't fair to say that this leads to widespread manipulation. There are many instances where these big players lose money. They certainly don't always get their stock calls right and their clients can and do lose money on poor advice.
The Australian stockmarket has a total value of around $1.5 trillion. The US market is a multiple of that.
It is very difficult for a few organisations to completely control or manipulate markets of these dimensions. They do have influence but the same can be said for banks in the property market or miners in commodity markets. Every market has influencing forces, and when understood correctly these can provide opportunity.
Myth No. 3: Stock investing is too difficult
You probably know a friend or relative who brags at family barbecues about the stockmarket and their successes.
Don't for a minute think that they have a "secret formula" or inherent skill that you can't find yourself. Some of the world's best investors have the most simple investment strategies. Take Warren Buffett, one of the world's richest people.
How did he make most of his wealth? Not in technical strategies but by following simple investment principles: buying good businesses that have strong demand and an ability to drive future profit. Coca-Cola is one of his best investments. We've all drunk one of its products. Gillette is another example. Keep it simple, stupid.
Myth No. 4: Investing overseas is difficult
It used to be difficult to invest overseas. Back in the 1990s you would need to open a bank account in each country you wanted to invest in, transfer funds into that country's domestic currency, do all the paperwork, pick a stockbroker, etc.
Thankfully we live in the digital age. This means that many online brokers such as my firm, Invast, now provide a range of solutions that open up offshore possibilities. One of the most convenient is investing via contracts for difference (CFDs).
They mitigate foreign currency risk when investing offshore - that's part of their appeal. If you don't understand how that works, call a CFD broker and get them to explain. Domestic investors have never had so much choice. The world is literally at their fingertips and trading costs have fallen significantly. Investing in Facebook, Apple or Google is now ordinary business for many global investors, regardless of where they reside.
Myth No. 5: You need a lot of money to invest in stocks
The average Sydney house is now worth $900,000, Melbourne isn't too far behind and Brisbane is quickly catching up.
Even taking a national average near $500,000 means you would need a 20% deposit plus transaction costs to get into the market. We're talking about $100,000 or thereabouts as a rule of thumb. If you wanted to buy a franchise, you're looking at $100,000 to $1 million for something decent. And then you would need to work hard for at least two to three years before seeing a dollar in return. There is no minimum to start investing in stocks. There are some practicalities around trading costs and brokerage amounts but as a general rule you can probably get started in the stockmarket as an investor for as little as $1000. The rich do have a lot of their wealth in the stockmarket but you don't need to be rich to get into the market.