5 Common Misconceptions about Trading & Investing
In the conference rooms, hallways, and break rooms of businesses everywhere you can overhear 5 common questions that come up in the conversation, which reflect 5 pervasive misconceptions about trading and investing.
1. Isn’t Day Trading Inherently Risky?
This is one of my favorites. Yes, day trading is risky like we might consider crossing the street to be risky. If we are wearing a blindfold, then we would be right to consider it as inherently risky. But if we have our eyes wide open, know the rules of where to cross and where not to, and are disciplined in continuing to look left and right as we do so, would you consider crossing the street to be inherently risky? Probably not. Think about how many times have you done it in your life, hopefully without incident.
The key is putting risk management first. If we know the rules of good risk management, are disciplined in sticking to those rules and are keeping our eyes wide open while we do so, and knowing what to look for, then we have the potential to learn strategies to balance the risks and rewards of day trading. Like many things in life, do wrong it is inherently risky, done right, and not necessarily so.
The key is to get educated and be building skills, evolving proficiency, and developing confidence. Plus “day trading” is just one style and time-frame of trading and investing on the spectrum ranging from short-term trading strategies at one end to long-term investing strategies at the other and everything in between.
2. How did the Stock Market do Today?
This is another very common one that reflects a lack of education. When asking this question, people typically mean what happened with the stock market indices like the Dow Jones Industrial Average index or the S&P 500 index or the NASDAQ index?
Good to know, but what many people don’t know is that the stock market represents a small fraction of the financial markets that trading and investing education introduces to you. Others being Futures, Forex, Options, Bonds. In actuality, these markets are much bigger, more active, and liquid than the stock market. Just to give you an idea, according to Nasdaq, the foreign exchange market or Forex market is the most actively traded in the world. More than $5 Trillion are traded on an average day which is 25 times the global equities trading volume.
It’s important to understand how these markets relate to one another. If you’re a long-term investor, understanding how one market affects another can help you truly diversify your portfolio. Or if you’re a short-term investor or trader, knowing how two assets might correlate to one another can give you clues into whether an asset with going up or down For example, Australia is the second-largest producer of Gold. So, when the stock markets drop, we can sometimes see a rise in gold prices as it can be seen as a safe haven and the Australian Dollar can follow, if a correlation holds.
3. Do You Have the Latest Financial App on your SmartPhone?
This fixation with particular indices or stocks (e.g., did you see how Apple did today?) is fueled by the latest financial apps for your smartphone. It has never been easier to move money or get data on the financial markets.
But, if we aren’t careful, we are data rich and information poor, education poor, and even worse, risk management poor. We have heard horror stories of uneducated people using the latest financial apps with no clue of what they are doing and the risks they are taking, with tragic outcomes.
Over the past few years, we’ve seen a surge in micro-investing. Mobile apps coupled with zero dollar commissions have spawned a new era of traders. Furthermore, we have a new trend in emerging…social trading. Applications suggest that if you follow a particular trader and just take their trades, you too would be successful.
4. How do I Spot Opportunities to Buy Low and Sell High?
It all fuels this question of how do I buy low and sell high? That question embeds the misconception that success in the financial markets is based upon buying and holding … buying low, holding the position and selling high … or more accurately, buying and hoping.
As we all know, hope is not a strategy. That amounts to speculation, which would be like crossing the street blindfolded. Removing the blindfold through education, support and community is a strategy.
Like any market, the equity markets work on the principles of supply and demand. Just like a white sale at your favorite store, or the after Christmas sales, the laws of supply and demand apply to the markets as well. When you run out of inventory, prices go up. When you run out of people buying products, like Christmas lights on December 26th, price drops.
Watching the news or understanding the health of the company is important. But equally important, if not more important, is being able to see where large banks and institutions are buying and selling. In other words, what price are they willing to pay or buy for a particular stock.
5. How Would I Ever Be Able to Learn all of This?
Which brings us to this question of the learning journey. This is the question we always arrive at when we realize there is a gap between where we are and where we want to be and we face up to the reality of what we need to learn to build the bridge to the other side.
It is always the same with anything worthwhile and meaningful in life, which we have undertaken the learning journey for … driving a car, learning a sport or martial art or musical instrument, developing a professional skill or trade, evolving a relationship, or being a parent.
Looking backward at a learning journey, we realize how far we have come. With what once seemed, looking forwards, and insurmountable journey. The key is to take the first step.
