There are three common misconceptions that I think are important for new investors to understand before they begin investing stocks.
In the Long-Run, Stocks Follow Their Earnings But in the Short-Term, They Fluctuate Wildly
Over time, a company is only worth the profit it generates for the owners. Bubbles can’t last forever and depressions end. Academics such as Dr. Jeremy Siegel has proven that most of the inflation-adjusted returns from owning stocks come from profits paid out to owners as cash dividends. One way to protect yourself is to make sure you don’t pay too much for a stock relative to the earnings by looking at the earnings yield.
One of the Biggest Keys to Financial Success and Investing in Stocks Is Avoiding Credit Card Debt
You simply cannot get ahead, even investing in stocks, if you have credit card debt. Even though this doesn’t fall within the purview of investing for beginners, I’ve written about credit card debt on my personal blog, including some ways to avoid it and the surprising fact that 55% of all households in the United States have no – absolutely zero – credit card debt. The bottom line is you can’t get rich paying 20% interest on your debt, while collecting only 3% dividends from your stocks.
A $50 Stock Can Be Cheaper than a $300 Stock
Sometimes new investors get excited over stock splits. That makes no sense. A stock split is a meaningless accounting transaction. But if you are inexperienced, you may think it is good for you! Likewise, a stock that trades at $10,000 per share could actually be a better bargain than one that trades at $10 per share. I wrote about this in an article called How to Think About Share Price.
More Information About Investing in Stocks
To learn more about investing in stocks, take a few minutes to read the comprehensive guide I put together for new investors called The Complete Beginner’s Guide to Investing in Stocks. It contains dozens of articles and resources to walk you through the fundamentals.
