5 Misconceptions People Have Regarding Investments
Investment is a great tool to not only generate wealth and meet your current financial goals but also meet your retirement fund. There are different types of options for investment like stocks, equities, real estate, gold, etc. Investment as a medium to generate money is proliferating ten folds among mass investors.
While there are numerous advantages to investing, including tax saving and risk-free investments, there also exist some myths which become an obstacle for potential investors. Let’s have a look at the top five misconceptions about investing.
- Investing Requires a Significant Amount of Money
Possessing a substantial amount of money may allow for more investment opportunities, but investing a moderate sum can also result in high returns over time. For instance, it’s easy to look at र 5000 investment in saving and think that buying stocks is not worth the effort. After all, an 8% return on र 5000 is only र 400, which won’t be sufficient for retirement. It is rightfully stated that investors don’t become wealthy overnight by financing र 5000 in a diversified portfolio of stocks. Though the potential of the share market lies in compounding returns. So, if you invest र 5000 per year in the stock market and make 8% annual return, your portfolio would be worth more than र 500,000 within 30 years. If you want to build a big corpus in the future but do not have adequate funds to invest now, you can even start investing as small as र 500 every month through SIP (systematic investment plan) route.
- The Value Of A Stock Will Go Up Eventually
The purpose of investing in the share market is to buy stocks of a business at a reasonable price. If the company has a decent business, it won’t matter if it is large, small, and/or has tremendous goodwill. Therefore, buying the stocks of companies only because their market value and price has dropped will get you nowhere as there is nothing riskier than funding in a stock that has not risen in value for months. For instance, A is a big company whose share price was at its all-time high at र 2000 last year but has since dropped to र 550. B is a smaller company whose share price has risen from र 200 to र 600. Mostly, every inexperienced investor will buy the shares of A company basing their decision on the fact that the share price of A will rise eventually as it is a big company. However, investing in company B would have actually benefited the investor. Thus, the risk factor in this decision is very high and can be the main basis for the loss.
- Investing in the Stock Market Is Equivalent To Gambling
Comparing the stock market to gambling is a misconception that many people on the internet have perpetuated for years. But, in fact, when you buy shares of a company, you have a right to the assets, liabilities, and a small section of the profits of the company. Thus, the distinction between buying stocks of companies and gambling is that you are speculating on the future of the company and a past record that you can track. The key to investing in the stock market is doing research and adopting a safe and rewarding strategy such as value investing. You can buy stocks of a company at a discounted value and keep them till you get a profitable return on investment.
- Investing Requires a Demat Account
When it comes to the mutual fund industry, an individual only needs a PAN card, a bank account, and a one-time process of filling up a Know Your Customer or KYC Form. The basic requirement is you must know how to open Demat account, which is used by many investors who want to trade in shares and stocks digitally. It is advisable to have Mutual fund units in a Demat account rather than maintaining the units with AMC (Asset Management Company). After that investors can invest across all AMCs and funds without filling any further address or identity documents. Investors who have a demat account may even purchase and trade stocks using their stock broker’s trading platform. Thus, a demat account is not compulsory for investing.
- Investing in Popular Companies Will Give Higher Returns
While investing based on your knowledge of a company may have specific benefits, there are also possible disadvantages. Depending on the industry, the stocks of famous companies may still be vulnerable to unexpected changes in the market. For instance, Twitter and Facebook are two popular social media brands, but in the past three years, Twitter shares are down by 45% and Facebook shares by 138%. Therefore, be open to acknowledging brands that may not yet be known, but have a sound business structure.
Investing in the share market seems simple but deters people to invest in the same due to some misconceptions about it. To summarise the points mentioned above, investing in the share market through presents you with the ability to invest in different asset classes with minimum to moderate to high risk depending on your risk-taking ability.