Picking Stock: "Myths"

     I want to invest in the stock. What stocks should I buy?......This is the popular question that has no one right answer. The answer depends on the person's knowledge and experience. The answer I will share here is also just a suggestion. No hard feeling if you choose not to believe. The reason that this is the frequently-asked question is most people still have not had enough fundamental knowledge to scrutinize what stock to invest themselves. Unlike investing in stock, depositing money in a bank is much more vividly conceived.

Have some money > Go to a bank > Deposit money > Get the principle and return back under the chosen term.


     Clearly, few people ask each other where and how to deposit the money because they know the process of depositing money in a bank. For example, some people just simply think that the bank they will deposit the money to is the bank that has highest interest rate and good reputation in terms of solvency.
     Moreover, when I was young (around age 8-10), my parents took me to a bank and opened a bank account for me. The purpose of opening the bank account for me at that time was to teach me about "saving". However, I believe a few parents took their children to the broker and open the stock account for their children so as to give them the alternative ways of saving. So, it is normal that why most people in the world have less stock's knowledge than bank's saving's.

     I will try to answer the "myths" that make people avoid investing in stock.

1. First myth: Stock is cumbersome, complicated, and use lots of money to start!

     In the past, investing in stock was really cumbersome and complicated. You needed to do lots of paper works, collected the evidence(script) yourselves, and found the stock broker that in the rural area was very rare. But, now, everything changed. you have online system, scriptless transaction, and lots of investment advisors near your home. Besides, you can start investing as low as you want, such as 100-1,000 dollars. Stock market is not the place for the rich people anymore. Don't stay with the old picture of stock and lose your opportunity.

2. Second myth: High risk, afraid of loss.

    First, we need to tune in the meaning of "risk". Risk, in my meaning, is "volatility" of the asset's price. For example, stock A today's price is 5$, tomorrow's is 10$/ Stock B today's price is 5$, tomorrow's is 35$. In this case, stock B has higher risk because of higher price's volatility. On the other hand, when most people think of risk, they tend to think of "LOSS". The latter meaning is very different from mine. If you conceive risk as the latter one, you look at the world just one side that the stock will only make you lose. If you have this attitude, don't invest in stock, because you will be stress out and your life will be more difficult. You need to change your attitude first that stock market is the study room where you can earn money if you study hard enough.

     After you successfully change your attitude, I will compare the risk between saving money at a bank and investing in the stock market. You will not believe that they have "similar risk". I will repeat the process of depositing the money at the bank here because there are some processes that I intentionally skip.

Have some money > Go to a bank > Deposit money > Stop!! before we reach the last step of getting the principle and return back under the chosen term,  banks have to generate profit from your deposit otherwise they will go bankrupt!

     The important question here is how banks make money from your deposit. If we know the process, we will know the risk, and then we can compare bank saving's risk to stock's.

     Major bank's profit comes from the difference between deposit rate and lending rate. Simply put, after banks get money from you as depositor, they will lend that money to a borrower, let's say a corporate. So, the risk here is that if all corporates to which banks lend the money go bankrupt, banks will not get any money back and could not pay your money back either. Therefore, the risk of saving the money at the bank is very similar to investing in corporate stocks through banks.
     On the other hand, if those corporates perform well, banks will get the awesome return, but you get only minimal deposit rate.*

* Here I'm not mentioning about FDIC and banks' risk management yet. These factors will reduce the bank risk.

3. Third myth: I don't need to invest in stock because I'm already rich.

     This myth is right because if you have enough money to spend for entire of your life, you don't need to invest in stock. However, how many people are certain that their money will stay with them forever or they can earn considerable income forever. So, ask yourself again that "Do you really have enough money to spend through out your life? if the answer is "Yes", you don't need to read this blog further, but if "No", this blog might help you in some ways.

     In sum, if you are still not confident that you have enough money to spend through out your life, try investing in stock (with the right attitude). Since investing in stock is not complicated and can start with just small amount of money, it is a great alternative place to save your money. However, if you don't know which stocks you should  buy now, just start with the bank you deposit the money, because you already considered risk and its reputation before you deposit your money in that bank.

     Below is the figure that shows the step you should proceed from 1 to 3.