Debunking the myths about trading in shares

When it comes to the world of investing, many people have no idea where to start, how to invest and what the risks are.

There are also several myths surrounding trading in shares that need to be debunked to help you to make informed decisions that will stand you in good stead in the long run.

● Myth No 1: Investing in the stock market is like gambling.

The reality of investing in shares is nothing like gambling. To understand why, we need to consider what investing in shares means. The concept of “buying a share” may be better understood if we phrase it as “buying a share (or portion) of a company”.

When an investor buys a share, it represents fractional ownership of a company.

This entitles the shareholder to a claim on the assets of that company as well as a fraction of the profits that the company generates in the form of dividends.

Those who believe that investing in shares equates to gambling do so because they think of shares simply as a trading vehicle, and don’t recognise that an investment in a share represents ownership in a company.

Investing and generating wealth should not be confused with the zero-sum game of gambling. Gambling merely takes money from many and redistributes it to a few. No value is ever created.

With investments, on the other hand, the overall wealth of an economy increases. This growth is reflected in companies’ share prices which investors benefit from if they hold shares for the long term.

Benjamin Graham, the father of value investing, rightly said that a market is a voting machine (gambling) in the short term, but a weighing machine in the long run. And investing is an endeavour for the long run.

● Myth No 2: You can time the market.

Timing the market is the idea that wealth can be created by predicting the right time to buy and sell.

While seemingly a sound idea in theory, it is a complete myth in practice as nobody truly knows exactly what the market is going to do.

Research shows that the cost of waiting for the perfect moment to invest typically exceeds the benefit.

The best strategy is therefore not to try and time the market, but rather to define your investment plan and invest as soon as possible.

If you don’t have the opportunity to invest your funds all at once, or you feel the risk of doing so is too high, consider investing smaller amounts more frequently.

Sticking to this approach can offer several benefits, including: rand-cost averaging, preventing procrastination, minimising regret, and avoiding market timing.

● Myth No 3: You need a lot of money to start investing.

There is a prevalent perception that investing in the stock market is a playground for investment banks, asset managers and ultra-high-net-worth clients, but this is not the case.

During the 1990s, the internet opened the market up to retail investors, and retail brokerage houses provided costeffective market access that made it easier for these investors to invest in the stock market.

The best way to start investing in the stock market is to start contributing monthly amounts to a retirement plan.

Your financial adviser can help you open a retirement annuity, which is effectively a personal retirement product.

Shares are typically one of the main underlying asset classes making up a retirement annuity.

● Myth No 4: Buy low, sell high.

This myth is linked to the idea of timing the market and is one of the most common investment myths among those who are yet to start investing in the stock market.

This inexperienced viewpoint says that you just need to buy when the price is low and wait to sell it when it reaches a higher price.

Even experienced investors battle with this however, and even if you find a stock with a low price, deciding when to sell is challenging.

● Myth No 5: The younger you are, the more risk you can take.

Younger investors tend to think about taking high risks to make extraordinary profits.

Though younger investors have longer investment time horizons, one should not fall for highly risky investments in pursuit of high profits.

Warren Buffett’s two investment rules:

● Rule No 1: Never lose money.

● Rule No 2: Never forget about Rule No 1.

● Wendy Myers is head of securities at PSG Wealth.