SPDR S&P 500 ETF (ETF: SPY), Google Inc. (NASDAQ: GOOGL) – 8 myths about stock trading that most new traders think are true
The right information and knowledge are among the key factors that influence a trader’s performance in the stock markets.
However, there are some things new traders think are true which can lead to bad trading decisions.
Myth # 1 – Stock trading is for the rich
You can start trading stocks with as little as $ 100. Check the minimum deposit requirement when choosing your online broker. You might be wondering how to gain visibility to say Microsoft Corp (NASDAQ: MSFT), which has a share price above $ 200, or Google’s parent company Alphabet Inc (NASDAQ: GOOGL), which is trading at over $ 2,000 per share. With Stock CFDs (Contract for Difference), a trader can gain exposure to these high value stocks with less than $ 100.
Myth # 2 – Stock trading is full of risk
Opponents will tell you that stock trading is too risky. Yes, stock trading does not guarantee returns. There are powerful risk management techniques, such as portfolio diversification and placing stop loss and take profit orders, that can protect your trading account.
Myth # 3 – High risk equals high returns
Each asset class involves a different risk-return tradeoff. This is based on several factors, such as trading volumes, liquidity, fundamentals, and exposure to economic and political news. Some stocks may offer better returns even with lower risk, while others may have a level of risk that is not justifiable by the potential returns. To understand the risk-return trade-off, investors can look at current valuations to determine whether a stock is undervalued or overvalued.
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Myth # 4 – Hedge is for hedge funds
Hedging is often viewed as an advanced strategy. The truth is, the principles are simple, and a little practice can go a long way. For hedging, consider the correlation between assets and choose those with the least correlation.
For example: you cannot use gold to hedge your exposure to the US dollar, as both are considered safe havens. However, gold can be used to hedge your exposure to growth stocks. This is because when investor risk appetite increases, growth stocks tend to rise, but when investor risk appetite is affected, safe havens tend to rise.
Myth # 5 – You Can Get Rich Real Quickly With Stock Trading
You can, but it’s pretty unlikely. Creating wealth takes time. Negotiating methodically, with discipline, patience and consistency can get you there on time.
Myth # 6 – You can’t beat the market
It is certainly difficult, but not impossible. There are solid investment strategies that can beat the market, and many of them are straightforward. For example, a well-planned value investing strategy could help beat the market.
Myth # 7 – Stock trading is like gambling
Stock trading can be like gambling if you approach it like one. However, following a methodical approach with discipline, testing strategies, following sound risk management, and keeping abreast of developments in the market can make stock transactions more predictable.
Myth # 8 – It’s better to use maximum leverage
Stock brokers can offer leverage as high as 1: 500, but it’s not a good idea to use maximum leverage for all trades. Leverage magnifies profits in case the markets move favorably, but also magnifies risk and can lead to excessive losses if the markets move against you. Thus, leverage should be used after gaining an understanding of the markets and should be combined with sound risk management.
To become a successful investor, it is important to dispel myths and equip yourself with facts and knowledge.
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