15 Most Common Misconceptions About Investing in the Stock Market

Thinking about investing in the stock market right now but aren't sure it's the right place to put your cash to work? Prolonged market volatility has made some investors skittish -- but for forward-thinking, long-term investors, there's never been a better time to make wise investments in companies that have staying power and can generate profits for years to come.

Here are the 15 most common misconceptions about investing in the stock market, busted.

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One of the most common myths about investing in the stock market is that you need to have a lot of money to start and keep building a portfolio. This simply isn't true.

Retail investors of today have a virtually endless array of possibilities to put their money to work in the way that is best for them, their risk tolerance, and the capital they are able and willing to invest.

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An effective investing strategy shouldn't look anything like gambling, but it's a common misconception that to be a successful investor you need to approach the stock market in this way.

In fact, a sustainable investing strategy that helps you build a profitable portfolio should be the exact opposite of this. Investing doesn't need to be a complicated game of chance.

When you build your portfolio around businesses that are profitable (or approaching profitability) and cash rich with multiple growth pathways and strong leadership, you can build wealth over time without the need for risky -- and often ineffective -- market-timing strategies.

Investing this way requires patience and a certain amount of time to put toward learning about the businesses and industries you want to invest in. But over the long run, it's far more sustainable than trying to build wealth by guessing what the market may or may not do.

It’s true that no investment is entirely without risk. However, the level of risk you take on as an investor is something you can mitigate to a certain extent and should be baked into your overall investing strategy.

Bottom line: You don't need to invest in highly risky or volatile companies in order to sustain portfolio profits and compound your returns over time.

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It's certainly not easy to be an investor when the market is going through a rough patch, but that doesn't mean you should avoid investing during these periods. When the market is going through a downturn, pulling up stakes and closing out your portfolio could actually hurt rather than help you financially, not to mention result in you sustaining serious and lasting financial losses.

Ideally, you should be investing during both turbulent and flourishing periods in the market so you can enjoy the advantages of both, which is getting stocks on sale and watching them grow with time.

While you should try to invest as consistently as you can, even if it's just a small amount of money each month, you should never put your entire cash position into your portfolio.

It's always wise to have savings, including your emergency stash, completely outside your portfolio. That way you can access it immediately if need be without any impact to your investments.

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Presented by Motley Fool Stock Advisor
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While you will need to dedicate a certain amount of time to learn about the investments you choose for your portfolio and staying up-to-date with developments that impact these holdings (such as financial reports, company announcements that affect the business, and leadership changes), you can invest in the way that works best for you and your schedule.

For some investors, this means focusing on pooled investment opportunities like mutual funds, index funds, or exchange-traded funds, which allow you to diversify into a variety of companies and sectors in a fund overseen by portfolio managers. Other investors prefer investing in individual stocks, or a combination of different asset classes.

The moral of the story here is that you can build your portfolio in the way that makes the most sense for you, your financial goals, and the time you have available to dedicate to your portfolio. Some investors like to add to their portfolio every week, while others prefer to do so every month or invest in bulk once a quarter.

Whatever your preferred style of investing or capital allocation, making regular additions to your portfolio and holding onto quality investments in both good times and bad are what count with the passage of time.

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While it's easy to view a declining share price of a company you own or follow and translate that into a negative overall attitude about the underlying stock, there's far more that's needed to separate a good from a bad investment than price fluctuations alone.

Certainly, a consistent decline in share price may be warranted, such as when an announcement from management or business development occurs that has investors worried about the company's future.

At the same time, particularly in the current environment, a company may simply see share prices fall in trending with the broader market, industry-specific factors, or as a result of shifting investor sentiment during a particularly volatile period, which doesn't necessarily undermine the quality of the underlying business.

Bear markets tend to unnerve even the most experienced of investors. If you're invested in the stock market for decades, it's inevitable that you will encounter a bear market (or several).

Use it as a window to invest in more of the companies you love at lower prices, or sit tight and wait it out, but don't see bear markets as your signal to cash out.

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While more capital means you might be able to grow your portfolio faster, you can start investing with whatever amount you feel comfortable with or have available to put into a portfolio.

Most brokerage accounts will allow you to purchase fractional shares of stocks. This means you could even invest in massive companies with otherwise unattainable share prices for as little as .001% of a share.

Just like a falling share price doesn't always spell long-term disaster for a company, a sudden boost in share price of a stock you like doesn't always mean you should drop everything and press the buy button. Never use share price movements alone as a reason to either take a position in or cash out of a stock.

Always carefully evaluate the factors behind these movements. Consider whether it changes or supports your investment thesis about the stock in question before you make a decision one way or the other.

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Presented by Motley Fool Stock Advisor
We hear it over and over from investors, "I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of "5 Growth Stocks Under $49" for FREE for a limited time only.

While you don't need to treat investing in your portfolio like a second full-time job, that doesn't mean you should buy stocks and never look at them again. It's important to view any investment you make with the mindset of of being a part owner of it.

As part owner, you want to stay informed about the company's financial statements, key business updates, management, and other details that will affect the asset you've put your hard-earned money into.

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You will save yourself so much time and trouble later on by taking care that you thoroughly review and understand any investment before you put money into it. For instance, closer scrutiny of a company may reveal deficiencies that don't align with your personal risk tolerance, or even details that lead you to pursue a more prudent use of your investment capital.

When you not only know but understand all the companies you own, and know and understand them well, you can better keep your portfolio aligned with your financial goals and work toward the returns you desire.

Don't get me wrong: Investing in individual stocks is a wonderful and incredibly effective way to build lasting wealth. However, there are plenty of other exciting investment opportunities outside of individual stocks for investors to consider as well, including funds, bonds, and real estate, to name a few other examples.

Diversifying your money into a variety of assets including stocks and other investment vehicles can help you build and maintain a robust and profitable portfolio that serves you well over many years.

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You remember that old adage. The idea behind it is a logical one to a certain extent -- getting stocks when they're on sale or trading undervalued and selling them much later for a profit. Of course, it always feels good to buy a great company at a bargain -- there are many opportunities to do so in the current market. And naturally, no one wants to sell at a loss.

Still, there's a danger to letting the "buy low and sell high" mantra be the primary guiding philosophy around which you build your portfolio. For one, while a stock may be trading cheap because of a reason not tied to the business at all, it could also be trading at a discount for a very valid reason. Investing in a stock purely because it's trading down and you hope to sell it at a profit later isn't a very achievable (or even profitable) way to build your portfolio.

Let's say you buy a great stock when it's down and it eventually goes up. Does that really mean you want to hit the sell button on a quality company you could potentially generate portfolio returns from for many years to come? The idea of "buy low and sell high" sounds great, and it's certainly the goal of most long-term investors, but it shouldn’t be your sole purpose when you invest. Otherwise, you might end up trying to time the bottom or the zenith of a stock, and forfeit both.

On the other hand, having a buy-and-hold philosophy -- namely, investing in great companies, and holding onto them for years to reap the rewards of compounded returns many times over -- is a much more attainable and sustainable way to grow your portfolio over time.

Although the stock market does have a habit of repeating itself, it's not wholly predictable. If anything, recent market events have reiterated that fact. While you can't predict the stock market, you can regulate your approach to it and keep building your portfolio on a continual basis.

Try to be just as regular about your investing habits when the market is down as when it's up, and you will have the advantage over many other investors who are still trying to time the market, or even staying away from investing altogether.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, "I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of "5 Growth Stocks Under $49" for FREE for a limited time only.

Many investors are worried about what the coming months could mean for the stock market. It is just as full of opportunity for long-term investors as ever, but that doesn't mean prudence isn't warranted.

Make sure you're regularly aligning the balance of your portfolio so that it conforms with your ability to handle your preferred level of risk right now.

Take a measured and judicious approach to building your portfolio. Keep investing in a diverse group of companies that are quality investments you can be confident about keeping your money in for years.

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