Despite its vital role in helping individuals to grow their wealth and achieve their long-term goals, the stock market remains widely misunderstood. Media headlines have done little to remedy this: they tend to focus more on sensationalism and fearmongering than informing readers.
If you’re to take advantage of the multitude of benefits the stock market offers, it’s vital to have a good understanding of how it works and how to use it. You’ll also need to be able to recognise the misconceptions that could influence your decisions.
Read on to discover a fresh perspective that could help you to make more sensible investing decisions and move closer to achieving your long-term financial goals.
2 common misconceptions that can hinder your investment success
There are two common misconceptions about the stock market that can affect how you invest and, consequently, your likelihood of success in achieving your financial goals.
1. “The stock market is an abstract concept; it doesn’t exist”
If you view the stock market as something you’re unable to interact with because it is too abstract, you may start to think of your investments as nothing more than a piece of paper. You may hope to grow your wealth but not have a good understanding of how that could happen.
As such, if your hopes don’t materialise into results in the time frame you’ve envisaged, you could become disheartened and even resentful of the market.
2. “The stock market is like a casino; the house always wins”
Perhaps an even more cynical view that some may take is that investing in the stock market is no more reliable than putting all of your money on black at the casino. If you take this view, you might even believe that the stock market is “rigged” so that only the “insiders” can benefit. In other words, you can only grow your own wealth at the expense of someone else.
Unfortunately, a minority of individuals do run investment scams and other types of reprehensible schemes, which have fed into this misconception. Long-term success is unlikely for those who fall into this category.
If you buy into these misconceptions, you are unlikely to continue to invest in the stock market for the long term. Those who do stay invested may make unwise decisions influenced by their beliefs.
A fresh perspective: consider that the stock market is all around you
The most important thing to understand about the stock market is that it is composed of the companies you interact with on a daily basis. The toothpaste you use to brush your teeth, the cereal you eat for breakfast, the coffee you buy on your way to work – many of these everyday items and services are made by companies listed on the stock market.
This means that you can purchase shares in any of these companies. Alternatively, you might invest in investment funds that contain shares from many different companies.
The CEOs, management teams, and boards of these companies work hard to generate profits and revenue. These can either be reinvested into the company to stimulate growth or paid to shareholders as dividends.
The high street is a collection of many of these listed companies.
Each time you buy a product from one of them, you are indirectly helping the company’s investors (which could include yourself) to grow their wealth.
This can be a helpful way of visualising the role that the stock market plays in your everyday life.
The financial media publishes stock market figures each morning that estimate how the value of the stock market might increase. The changes in value are a result of the actions of individuals who engage with it.
By taking a sensible approach to investing, you’re more likely to achieve long-term success
When you understand how the stock market works, you can feel confident that you are making the most suitable decisions for your circumstances and goals.
A helpful starting point in this regard is to think of the stock market as your local high street. It’s not an abstract concept or a rigged casino; it’s composed of real companies run by real people.
When markets become volatile or uncertain, many investors may panic, selling their shares and moving to the perceived safety of cash. To avoid falling into this mindset, it may be reassuring to think of those real people making tough decisions to ensure their companies remain profitable.
By staying calm and riding out the storm, you give your wealth a greater opportunity to experience growth over the long term.
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