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Market Myths - Essay Example

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Summary
Investopedia (2002, pg. 1) claims that, "When fiascos like the Enron bankruptcy,auditing scandals and analysts' conflict of interest occur, investor confidence can beat an all-time low. Many investors are wonder whether or not investing in stocks is worth all the hassle…
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Market Myths

Download file to see previous pages... Myth Number One is that some people equate investing in the stock market to gambling with their money. As a result of this fallacy, a significant number of individuals avoid the stock market. An understanding of the reasoning behind purchasing stocks needs to be well-known in order for an individual to understand how investing in them is different from gambling. It is important to remember that a share of stock represents partial ownership in a company, and it gives the person who owns the stock some of the profits that the company makes and allows that individual to share assets (Investopedia, 2008, pg. 1).
"Too often, investors think of shares as simply a trading vehicle, and they forget that stock represents the ownership of a company. In the stock market, investors are constantly trying to assess the profit that will be left over for shareholders. This is why stock prices fluctuate. The outlook for business conditions is always changing, and so are the future earnings of a company" (Investopedia, 2008, pg. 1).
It is a rather daunting task to determine the value of a company at any given point. The Random Walk Theory applies, and this theory states that "there are so many variables involved that the short-term price movements appear to be random (Investopedia, 2008, pg. 1). ...
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Also according to the article by Investopedia (2008, pg. 2), "Gambling, on the contrary, is a zero-sum game. It merely takes money from a loser and gives it to a winner. No value is ever created. By investing, we increase the overall wealth of an economy. As companies compete, they increase productivity and develop products thatcan make our lives better. Don't confuse investing and creating wealth with gambling's zero-sum game."
Myth Number Two is that the stock market is some type of fancy, executive club reserved for the wealthy and for brokers and that the average person cannot play, or at least cannot play very well. The fact is that brokers do not hold all of the secrets anymore. Thanks to advances in technology and the advent of the Internet, all of the forecasting a research tools that brokers use are available to the general public as well, and they are really easy to get at pretty much any retail store that sells books and electronics (Investopedia, 2008).
"Actually, individuals have an advantage over institutional investors becauseindividuals can afford to be long-term oriented. The big money managers are under extreme pressure to get high returns every quarter. Their performance is often so scrutinized that they can't invest in opportunities that take some time to develop. Individuals have the ability to look beyond temporary downturns in favor of a long-term outlook" (Investopedia, 2008, pg. 3).
The third market myth is that stocks that have risen high and fallen will rise again. This is not necessarily true. Investopedia (2008, pg. 3) offers the following example:
"Suppose you are looking at two stocks:
XYZ made an all time high last year around $50 but ...Download file to see next pagesRead More
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