Common stock market myths

In simple terms

Some beliefs about the stock market are repeated so often that they sound like facts. Several of them are wrong, and the wrong ones are not harmless: they lead people to hold on to failing shares, buy things because they look cheap, or quit their jobs to trade. They are also exactly what scammers and sellers of courses use to persuade.

This lesson takes seven common myths and checks each against arithmetic and evidence.

Myth 1: "The market always goes up in the end"

Broad Indian share indices have risen over long periods in the past, and long-term investors in a diversified basket have generally been rewarded. But that history includes falls of 50% or more that took years to recover, as the bull and bear markets lesson describes. And it is true of the broad market, not of every share. Individual companies go bankrupt, are delisted or fade away, and their shares do not come back.

The past rise of indices is also partly survivorship bias: failed companies drop out of the index and are replaced, so the index keeps only the survivors.

Myth 2: "It has fallen so much, it has to bounce back"

A share's past price creates no obligation. If a company's prospects have worsened, its share price can keep falling. And recovering from a big fall needs a much bigger rise.

Myth 3: "A low share price means it is cheap"

The price of one share depends on how many shares the company has divided its value into. On its own, it says nothing about value.

Low-priced shares of small companies, often called penny stocks, are also the favourite targets of pump-and-dump schemes, because a small amount of buying moves their price a lot.

Myth 4: "Trading is a quick way to earn a living"

SEBI has studied how individual traders actually fared. Its study of intraday trading in the equity cash segment found that about 7 in 10 individual intraday traders made a net loss in 2022-23. Its study of equity futures and options found that 93% of individual traders made losses over the three years 2021-22 to 2023-24. The investing compared with trading lesson explains why costs and competition make short-term trading so hard.

People who sell trading courses and tips often present trading as a career anyone can learn in weeks. The evidence points the other way.

Myth 5: "Big, famous companies are safe"

Size and fame reduce some risks, but they do not remove them. Large, well-known companies have collapsed through fraud, debt, technology change or competition, in India and around the world. A famous brand is not the same as a sound balance sheet. Spreading money across many companies, rather than trusting one, is the protection.

Myth 6: "Someone out there can reliably predict the market"

Commentators, tip groups and software all make predictions, and some will always be right by chance, which is how a perfect-looking track record can be manufactured. Prices react to news that nobody knows in advance. No one has shown an ability to predict short-term market moves reliably, and anyone who claims certainty is selling something.

Myth 7: "Every IPO is a quick profit"

Some new listings rise sharply on their first day, and those are the ones that make headlines. Others list below their issue price or fall in the months after listing. An IPO is a company selling shares at a price it and its bankers chose; the IPO basics lesson explains why that price is not a discount.

Why it matters

Each myth leads to a specific costly behaviour: holding a failing share while waiting for it to "come back", buying shares because they are "only ₹10", quitting a job to trade, or concentrating money in one famous name. Myths are also the opening line of many sales pitches. If you no longer believe them, those pitches lose their grip.

Limitations

Correcting a myth does not mean the opposite is true. The market does not always fall, low-priced shares are not always bad, and some traders do make money. The point is that none of these simple rules can replace looking at the specific company, the price paid, the costs and the risks. The SEBI findings quoted here describe the periods they studied.

Common mistakes

• Averaging down into a failing company because "it has to recover".
• Counting shares instead of value. Owning 10,000 shares of a ₹5 company is not better than owning 50 shares of a ₹1,000 one.
• Generalising from the index to a single share. The index survives by replacing its failures; your holding does not.
• Learning from stories, not statistics. You hear about the trader who got rich, not the thousands who quietly stopped.

Try it yourself

1. Write down two beliefs about the stock market that you held before starting to learn.
2. For each, find one lesson on this site that supports or contradicts it.
3. Pick any share priced under ₹50 and any priced over ₹2,000. Look up each company's market capitalisation and yearly profit on the exchange website or in its results, and work out how many times profit each is valued at.