Myth Busters – Stock Market Edition

The local economy seems firmly stuck between the proverbial rock and a hard place, with our biggest problem being debt and lacklustre economic growth.  In such a scenario, it’s important to know how to make the best use of your hard earned dollars. Without a doubt, the surest way to stay ahead of economic trouble is with steady, compounding growth opportunities. In times past, investors counted on bonds for a nice payout.  However, since the after math of debt restructuring, interest rates have been significantly lower, causing more people to take a look at opportunities in the stock market. With good reason; because in the world of investing no other asset class has outperformed the stock market in the long term, including real estate.   In order to help you make good use of this powerful investment tool we want to dispel some of the myths about successful investing in the stock market. 

Stocks are only for people educated formally in finance.

This myth needs to be dispelled 1st, because the truth is a “normal person” like you — regardless of education or experience — can invest successfully in the stock market. The core knowledge and strategy of stock investing are quite simple in theory – buy low and sell high. While there is no doubt certain concepts that you need to learn about, such as book value, dividend yield, price-earnings ratio (P/E), return on equity, etc.  They all are concepts used to know what is low and what is high in a market.

Stocks are about speculation and gambling.

People tend to approach the market with a very short-term mindset. You should never rush your investments hoping they will produce profits overnight. Any investment designed to make money quickly is not a true investment, but is instead speculation or gambling. A good investment is not made by ‘crossing your fingers’, but buy careful analysis of a business and the environment it is in. When you buy shares of a stock, you are part owner of that company; so act that way.  Get to know your company and its prospect for future growth.

Stocks with a low share price are cheap.

It is very possible that a stock trading at $0.05 is more expensive than one trading at $500.00, as far as its value is concerned. The most common measure of how ‘cheap’ a stock is, is its P/E ratio, which takes the share price and divides it by a company’s annual net income. Generally, stocks with P/Es higher than the broader market P/E are considered expensive, while lower-P/E stocks are considered not so expensive. There are many other metrics used to determine a stock’s value, but the point here is simple, buy a stock based on its value, not its dollar price.

If a stock is listed on an exchange it must me good.

Regulators like the Jamaica Stock Exchange or the Securities Exchange Commission in the US allow corporations to list their companies and allow investors to take part in the business. They ensure that the companies meet certain listing requirements so that investors can know they are not just buying a company that is nothing but a piece of paper. However, as long as all requirements are met, a company that plans to sell ice to Eskimos can get approved.  It’s quite possible that a company listed on an exchange is bleeding cash, racking in losses and is just an all out bad investment.  Investors must understand that a listing on an exchange is not a seal of approval on the merits of the business by the regulator. This is why it is important to do your research and work with an investment advisor that can help you sort through the mountain of data to help you narrow the list of companies that are worthy of your hard earn dollars.

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