8 Myths About Stock Trading 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 a few things new traders believe to be true, which can lead to poor trading decisions.

Myth #1 – Stock Trading is for the Rich
You can begin stock trading with as little as $100. Check out the minimum deposit requirement when choosing your online broker. You may wonder how to gain exposure to say Microsoft Corp MSFT, which has a share price of over $200, or Google parent Alphabet Inc GOOGL, which trades higher than $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 Risks

Naysayers will tell you that stock trading is too risky. Yes, stock trading doesn't guarantee returns. There are powerful risk management techniques, like portfolio diversification and placing stop loss and take profit orders, that can protect your trading account.

Myth #3 - High Risk Equals High Returns

Every asset class implies a different risk-reward 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 pose a level of risk that is not justifiable by the potential returns. To understand the risk-reward tradeoff, investors can consider current valuations to determine whether a stock is undervalued or overvalued.

RELATED: HOW TO DAY TRADE

Myth #4 – Hedging is for Hedge Funds

Hedging is often considered an advanced strategy. The truth is that the principles are simple, and a little practice can take you a long way. For hedging, consider the correlation between assets and choose those with less correlation.

For example: You can't use gold to hedge your exposure to the U.S. dollar, since both are considered safe-haven investments. 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 hurt, safe havens tend to rise.

Myth #5 – You Can Get Rich Very Quickly with Stock Trading

You can, but this is fairly unlikely. Wealth creation takes time. Trading in a methodical way, with discipline, patience, and consistency can get you there in time.

Myth #6 - It’s Impossible to Beat the Market

It’s certainly challenging, but not impossible. Sound investing strategies exist that can beat the market, and many of them are simple. For instance, 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 as such. However, following a methodical approach with discipline, testing strategies, following sound risk management, and keeping yourself updates with market-moving events can make stock trading more predictable.

Myth #8 – It’s Best to Use Maximum Leverage

Stock trading brokers may offer leverage as high as 1:500, but it's not a good idea to use the maximum leverage for all trades. Leverage does amplify profits in case markets move favorably, but also magnifies risks and can result in undue losses if markets move against you. Thus, leverage needs to be used after gaining an understanding of the markets and should be combined with sound risk management.

To become a successful investor, it's important to dispel myths and equip yourself with facts and knowledge.

Photo: Nataliya Vaitkevich from Pexels