Dec 12, 2008
FirstCaribbean revenue, profit diminished
FirstCaribbean Inter-national Bank Limited (FCIB) is expected to report year-end profits that have fallen off by US$80 million or 31 per cent when its earnings report becomes available.
[ more . . . ]

Dec 10, 2008
Global crisis hits Agostini’s rights issue
Agostini’s Ltd has suffered a shortfall in its rights issue which closed on October 22, 2008.
[ more . . . ]

Dec 08, 2008
BSE not fearful of crisis
THE Barbados Stock Exchange (BSE) does not foresee any major impact on its operations as a result of the global financial crisis
[ more . . . ]

Dec 08, 2008
FirstCaribbean affected by global financial crisis
THE current global financial condition has significantly impacted the net income of one the largest banks in the Caribbean.
[ more . . . ]

<< Opinions and Analysis

Stock Market Myths

March 25th, 2004 - Published in the Business Section of the Trinidad Guardian

Exposing some of the myths of investing in the Stock Market

Everyone wants to get in on the action. The number of people investing in the stock market is probably at an all time high. Even more people are watching anxiously from the sidelines wondering how to get in. All of this is understandable given that almost every other share has generated returns of 100% or more over the past 14 months. Here at West Indies Stockbrokers Limited we have had a number of requests to host seminars at companies seeking to provide a forum for their employees to get more information on investing in the market. Out of these sessions a number of questions have come up suggesting that there are quite a few misconceptions that pervade the public's view of investing in the stock market.

This article will attempt to debunk some of those myths thereby giving investors a better understanding of the stock market.

Myth #1: The stock market is only for the rich

Nothing could be further from the truth. The stock market is one of the ways that you can acquire wealth but it is not an exclusive club for the rich. The hard reality is that the only way to actually make money in the market is to be in the market. Standing by and looking from afar seeing the gains and not getting involved means that those gains actually belong to someone else.

It is the “someone else” that you will eventually look up to as being rich. The stock market helped him to get there.

The point is that inaction has a cost. Don’t be afraid get involved now! If you qualify to open a bank account then you qualify to buy and sell stocks, all you have to do is call a stockbroker.

Myth #2: The stock market is nothing more than a gamble

The stock market is variable it might even be volatile but a gamble it most certainly is not. There is a method to the madness and it is the responsibility of each and every investor to seek out the knowledge and understanding necessary to be successful in the market.

The variability in the market comes from the fact that the dynamics of the market are constantly changing. The economy changes, business conditions change, companies themselves change, some for better some for worse. Over time say five to ten years empirical evidence suggests that there are significant gains to be had in the stock market.

Compare this to gambling which is essentially a zero sum game. Rather than create wealth over time as the stock market does, gambling simply takes money from the person losing and transfers it to the person winning. No value is ever created. You can gamble for years and most likely end up losing as much or more than you have won. This is hardly the case if you adopt a sensible investment strategy on the stock market.

Myth #3: The stock market is for everyone

Yes and no. The stock market is one of the few investments where you can start with no minimum balance. However you must be practical in terms of the number of shares that you purchase at any one time. There are risks to investing in the stock market and unless you understand those risks and can take steps to manage them it would be very unwise to put your entire savings at risk in the market.

Myth #4: Stocks that go up must come down

When Sir Issac Newton coined his Law of Gravity he did not have stocks in mind. There is no gravitational force that pulls stocks back down. Stocks can go up and continue to go up. Think back to ten years ago. What was the price of RBTT, GHL, RBL and Neal and Massy shares then? Ten years ago these companies traded at $2.24, $1.27, $4.76 and $2.50 respectively.

It is true that most shares are currently trading at their all time high. However, ten years ago they were probably also trading at an all time high.

The point is that the economy is growing and companies are growing. Once this holds true over the long term then stock prices will continue to appreciate.

That is not to say that there will not be up and down movements over the short term. There are many instances where a stock is overvalued and the price will go down in the short term. Over the long term one would be hard pressed to find a stock of a well managed company in a good growth industry that has decreased in value.

Myth #5: If a share price falls it must eventually go back up

Ever heard of Enron? In business there is a thing called bankruptcy. On the local stock market BWIA was very recently in danger of suffering this fate. Do you anticipate that the dynamics of the airline industry will change soon?

The share price is only part of the investment equation and buying low priced stocks is not always the best investment decision. The goal should always be to buy good companies at a reasonable price. It’s the same as shopping, you usually get what you pay for and most often you have to pay a price for quality.

Myth #6: Once I have gotten my share that’s it

Most of us have been “spoilt” in that we have grown accustomed to putting our money in an interest bearing account and that’s it. There is an old saying in investment circles – “there is no such thing as a free lunch”. As an investor you need to be aware of what you are investing in, you need to actually take the time and do some work to earn your return. This is only common sense. Investors who are prepared to follow the market and the issues inherent in the market are the ones that usually succeed on a consistent basis.

If you don't have the time to fully understand the markets then at least take the time to consult with your stockbroker. However try to at a minimum to know enough to be able to judge the quality of the advice given by your stockbroker. Remember it’s your money that is being risked. Be wise.

Please send your comments to Ian Narine at iann@wisett.com

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