InvestorQ : What are some of the general myths that first timers have about the stock markets and how to think through them?
swati Bakhda made post

What are some of the general myths that first timers have about the stock markets and how to think through them?

Dia Deshpande answered.
3 years ago

Well, it is not just first timers, but even people who have been in the market for many years are victims of some kind of myth or the other. It is hard to say what are these myths but I can think up a few popular myths that traders and investors have about equity markets. Here are some myth-busters.

· You don’t need to be a millionaire to trade markets nor very rich. It is a myth that equities are only for the super rich. You don’t need to be a millionaire to trade markets. Demat allows you to even buy 1 share of any company so trading is not all that expensive or exclusive. You only need to bring in a margin to trade and you can start trading with a small margin of Rs.10,000.

· No trading is not gambling and it is not even like gambling. When you gamble, you only know the odds of your success. When you toss a coin, you know it could be head or tail. That is predictable and can be converted into speculation. However, when the coin is tossed, you don’t have any way to know for sure. That is where gambling ends and serious trading begins.

· Every stock that has fallen sharply is not a buying opportunity. Imagine, if you had harboured such thoughts about Yes Bank or about Jet Airways. A bad stock is not worth buying at any price. Focus on the quality of stock you are buying and the level at which you are buying and forget falling knives.

· Stop losses have to be set at the time of initiating the trade and not after the trade. You may feel confident that you can put stop losses at a later date but that is not a good practice because you could beater by volatility. Ideally, put your stop losses when you initiate the trade. In fact, even your profit targets should be inputted in the system at the time of trade initiation.

· Good trades don’t outsmart the market or even try to outsmart the market. Rather, they identify the underlying trend of the market and stay with the market trend message. If you have a view on the market that goes against your view, then the market is actually trying to tell you something. Smart trader, listen to the market wisdom and fine tune your strategy accordingly.

· Normally trade is not a high risk / high return game at all. If you find it a high risk an high return then you are probably in the wrong assets. Trading in equities involves risk but that is the nature of stock markets. Trading is not about taking on higher risk but it is actually about managing risk. Set realistic expectations for returns and manage risk accordingly.

· Borrowing is never smart idea for investing, even if you are totally confident about the call. Always trade with your own money; never with borrowed money. When you trade on margin, you are already leveraged. By borrowing for the margin, you are only adding to your solvency risk.

· No, you cannot become a great trader by just aping what the big names in the market are doing. Following the actions of star traders will not get you anywhere. That is because; you have to trade according to your risk appetite. The star trader may have a different level of risk appetite.

· Don’t hope to repay your home loan with your trading profits. It does not work that way. Trading profits are uncertain. Hence you must never try to pay certain liabilities by investing in uncertain assets. Keep trading profits entirely separate from any of your fixed commitments.

· Last big myth is that technical analysis is rocket science, which it is not. You can do it yourself and you must do it yourself. That should be the direction.

Just a word of caution for traders! Most hot tips have an axe to grind. Just avoid them!