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11th April, 2016
Mustafa Muhammad Hussain |member of CFA Society Emirates
The stock exchange has been the topic of many discussions and will continue to be so due to its complexities and the evolving challenges faced in this domain by relatively new stockholders. These challenges are often seen to require innovative methods and procedures of analyzing and managing stocks, which gives birth to myths investors in almost all regions are convinced of.
It has been observed that a large portion of the general public is not very inclined towards this type of investment as they have concerns over many of the following myths about stock markets:
(1) Only finance gurus or experts know how to invest:
To a certain extend this is true. However, investing in shares is not as complicated as it is often made out to be. Like any form of investment, it has its own unique characteristics which need to be understood before any transaction is made. You do not need to be expert in finance to comprehend these; just general guidelines from a friend or the Internet can help.
(2) Only rich people can invest in the stock market:
Opening an account with a brokerage firm is easy and the minimum balance requirement to get you started is very manageable in most cases. So anyone, even with limited savings, can pursue stock investments.
(3) Your investments can be lost in a single bad venture:
If you buy a share worth AED 10 and its price falls to zero, then this will be true. However, how many instances in history can you recall where the price of a stock had reached zero? In lay-man’s terms, this is the concept of limited liability. Your liability is limited to the amount you have invested, so no one is going to come and ask for additional money because the shares of the company which you invested in has gone into net losses. Hence, if you are concerned about fluctuations in the stock market, you should only invest an amount which will not hinder paying for daily necessities. Therefore, any loss made would not cause major financial harm.
(4) If you know how the stock market works, you can make billions:
We need to understand that investing in the stock market and gambling are two different things. It is not gambling in the sense that there is a possibility of losing or winning everything. Gambling is all about winning or losing where one wins while others lose. Stock investments are very different since you pay a price to buy ownership (or a share) in a company and in return you will either get dividends or capital appreciation, or both, of that share. A good analyst, after thorough research, is capable of deriving the true intrinsic value of a share; which can differ from the market value of that particular stock. Studies have shown that in efficient markets, very few people have been able to benefit from investments that are seemingly contrary to market trends. So in general, investors can earn based on the benchmark that has been set.
Let me apologize for using financial jargons in the article. Nevertheless, in conclusion, one must remember the most basic concept in finance: “high risk, high return”. A successful investment requires knowledge, hard work and luck. The stock market is unique, the most researched investment avenue and has always kept investors interested despite the many economic downturns and bubble bursts.