When it comes to doling out advice on stock market trading, there are plenty of experts who are willing to tell people the "best" ways to do things. However, what many experts fail to tell new traders is that there are a number of common misconceptions that those new to the trading world tend to have. Believing in these misconceptions can lead any trader down a slippery slope and cause you to start making poor decisions that can majorly impact your financial success in the trading world. With this in mind, here are five of the biggest stock market misconceptions that any trader know about, and do their best to stay away from.
1. Stock Picking is Easy
There are many people that believe that stock picking is easy. The truth of the matter is, if it was so easy, everyone would trade to make money. Take a look at the real statistics. Approximately, 90% of traders lose. Furthermore, around 80% of professional money managers fail to beat the S&P 500 every year, yes even in a bull market. In today's market approximately 70% of stocks go down, meaning there are about 30% that are outperformers. It is very difficult to pick stocks in that 30% which is why you should never assume that picking stocks is easy.
2. Commissions Really Matter
Here is the truth about brokers, they love advertising. Everyone has seen these attempts, with brokers angling to save consumers $2, $3 or even $5 per trade. However, unless you are a scalper or a degenerate day trader small commissions savings don't really matter. Instead focus on the big picture, look at finding stocks that can spike anywhere from 20-50% so you never have to worry yourself with small fees.
3. Penny Stocks are All Scams
There is a common misconception that penny stocks are scams. However, most people only think this because they don't really understand what penny stocks are. Before you make assumptions about penny stocks, it is important to learn the basics of penny stocks and how they work. Yes, there are some penny stocks that are scams, but there are others that are just small developing companies. Investing in these companies and their speculative products may be a bit risky but it is not illegal. In fact, there are some penny stock companies such as True Religion Jeans and Jazz Pharmaceuticals that have grown into massive multi-billion dollar companies.
4. You Can Only Make Money in Bull Markets
If you go into trading with this mindset, you will never make any money. People should learn about short selling, or betting on lower prices, if they want to make money. In fact I'll give a little crash course right now: short selling (or simply "shorting") is what you do when you expect the price of a security (in this case a stock) to go down. When you expect this to happen, you borrow stock from a lender in order to sell it off to other customers. You'll have to repurchase everything you sold later through a process called "covering," but if the price of the stock does in fact decline, you will profit from the difference (depending on the agreement with your lender, you may also have to give them a cut of the profits). The bottom line is that you're selling something at a high price and buying it back at a much cheaper price. This is important as unfortunately, many companies fail, especially small ones. You can actually profit from stocks going down, you just have to know how to do it. Here are some examples of my profiting from shorting penny stock pumps so you can see this in action.
5. You Need Big Winners to Get Rich
If this misconception was true, many of today's most successful traders wouldn't have any money. Look at my millionaire students, they average around $1000 to $2000 in profits per trade. However, over years and years this adds up to millions. Plus, if you start with trades like this, you can take on bigger positions for bigger potential profits. However, you need to remember that it is best to take it slow like this first and avoid feelings like you need to go for grand slams early on with small accounts.
Knowing tips and tricks in the industry is important, but so is being aware of the most common misconceptions that tend to lead many new traders down the wrong path.