THE BLOG
09/16/2014 10:59 am ET Updated Nov 16, 2014

Debunking Five Stock Market Myths

scotspencer

Looking back on all the financial scandals in the last 10 years or so, it's amazing that investors still love the stock market!

However, there is still a big portion of investors that don't think it's worth it to invest in the stock market. They've voted with their wallets too. There is an estimated $10 trillion sitting in cash right now. In addition, money flows into bonds and bond funds even with the fear of interest rate hikes looming, and a stock market that continues to march higher.

I think it's important to be positive but realistic. Our economy has some real problems. Even with the real problems the stock market has, it also has some real myths attached to it.

Here Are 5 Stock Market Myths:

1. The Stock Market Is Rigged.
I completely understand this idea. With all the scandals and incidents that look really suspicious, it's still absurd. Think about it. It would take thousands of people to coordinate around the globe to "fix" the stock market. There is no way a global effort from the entire industry could collude to accomplish this. It's definitely a tall tale and a myth. Spend the time getting educated about investing and it will have more clarity.

2. Stock Market Investing Is Gambling.
With gambling, you take money from a loser to pay a winner. No value or wealth is created in or for the economy. That's not the case with investing. When you buy a stock you buy ownership in a company. That company in turn produces something that is of value, otherwise it would cease to exist. So with gambling you produce nothing, it's just a shift in wealth, where investing creates wealth.

3. Losing Stocks Come Back.
If I had a nickel for every time I hear this one... I'm not sure where this myth came from, but it's one that certainly does it's fair share of damage. I've watched investors wait for years on a stock to "come back". Keep this in mind. Just because a stock hits $50 per share at some point, doesn't mean it will ever again. (go back and reread that again.) You might be better off selling the losing stock and reinvesting those proceeds in better prospects.

4. Winners Will Fall Eventually.
This is another myth. A stock is not a ball that has to adhere to the laws of physics. Some companies show unprecedented growth for decades. I'm also not saying that a stock won't be subject to a correction at some point. What I'm saying is if a company has great management and a business that has a need, there's no reason to think that won't continue.

5. You Have To Have Money To Make Money.
That's definitely a myth. I've seen lots of investors become millionaires by investing small sums every month into IRAs or 401(k)s. It just takes time of course. Dollar cost averaging is going to be the friend of every investor. Investing smaller sums over decades begins to really add up. It takes more initiative to get started and not so much money.

There seems to be a believability about all of these stock market myths. That's where things could be dangerous to your financial health. Believing in any one of these could cause your to not reach your financial goals. The best advice I can give is to be educated. Spend time learning how and why the stock market works. You'll be glad you did.

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