The stock or equity market is where the organized issuance and trading of publicly held company shares occur, either via various exchanges or through over-the-counter markets. Stock market trading lends capital access to companies in exchange for granting investors partial ownership status in the company. As with any dynamic market driven by many, different, and often conflicting forces, the stock market has a fair share of myths surrounding it. Here are some fallacies that muddle decisions for investing capital in stock equity.
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Stocks that fall bounce back eventually
Many investors choose fallen stocks based on a previous high-selling price on the rationale that the shares will regain their old glory at some point. This mode of thinking is dangerous specifically because it relies on pricing, which is a small part of the investment equation. Instead of wishful thinking, the investor’s should aim to buy good companies at a reasonable price point.
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What goes up will come down
When a stock’s value has shown nothing but steady, consistent growth over a span of a few years, and if the stock belongs to a company led by competent managers, there is no reason for its price to drop any time soon.
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Stocks are best bought on momentum
Earnings momentum refers to an observable pattern of increased growth rate in earnings per share from one period to the next. While shares experiencing momentum show strength, the costs involved to trade them are usually hiked up, cancelling out of net gains. Furthermore, gains from momentum investing are usually short-term, making the strategy tax-inefficient.
A recognized financial expert Marguerite Cassandra Toroian is founder and chief investment officer of Delaware investment advising firm Bell Rock Capital. Learn more about her experience on both buy and sell sides of the equity market here.
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