Ethan Ho is a guest writer for our blog. He is part of the investing & financial literacy team that helps build the investingnote community. We thank you for his invaluable contribution.
You have probably heard stories of people who’ve made investments. These people range from veteran institutional investors like Warren Buffet, Carl Icahn to associates, friends and little known hearsays. The similarity is, all of them have made some sort of money. But what stops everyone from doing so?
You’re probably reasoning that the big boys can make money because they already have the capital, skills and maybe some insider info.
Isn’t it obvious enough? True only to a certain extent.
Let’s break down the 5 actual reasons why investing seems difficult for most:
Steep learning curve
If you’ve never taken a finance course back in school or know absolutely nothing about finance, the thought of investing might scare you. Assessing the valuation of a stock through the company’s profile, financial reports and even research firms’ projections is terribly time consuming. There’s fundamental analysis and then there’s technical analysis. Each is a separate school of thought in investing. Learning both to hone your trading skills on your own is just way too time consuming.
Barriers to entry (a) Knowledge
Let’s face it: to be able to learn finance in school is a privilege. A privilege that is often invisible to those who study it as part of their majors. For the same amount of time taken to take a bachelor’s degree, business finance majors spend all their time honing their skills that aids them in making informed investment decisions as compared to their non-finance peers. Many of us who’re not specialized in finance can definitely relate to this. Of course you can learn it by yourself, but what we’re really saying is that the high barriers of entry due to the inherent complex nature of finance makes it harder to do so. Furthermore, finance courses by stock educators and professionals can cost thousands of dollars just for a few lessons. All these are barriers to entry. Sometimes to the extent to which people give up on learning and being interested midway.
Barriers to entry (b) Capital
Another barrier to entry is capital. Let’s just talk about the local stock market. Before shares trading were reduced from 1,000 shares to 100 shares per lot, it implied that only people with a decent amount of money could invest. Let’s take for example, Singtel’s stock. It trades within range of $3 to $4. So the minimum capital required to buy just one lot of shares would be $3000 to $4000. To some, it might seem reasonable. But remember that a stock bought is an opportunity cost to diversification.
Lack of role models
We all know that when it comes to learning about investing, it can get really lonely. Like with every skill, role models are an important contribution to the learning process. A role model can either be a professional or someone with experience. In the world of investing, nobody can be held responsible for your gains or losses. However, it would help if there was a role model or mentor to guide your learning process with a certain direction and investing styles. It makes the entire learning and investing process much pleasurable and easier to follow. Most the ‘mentors’ and ‘role models’ out there usually charge a fee for students to take up their classes and workshops. Hence, role models seem to be an optional and expensive choice, rather than serving as modest mentors.
Fear & Risk
You’ve probably heard stories of how people got ‘burnt’ by trading stocks. It can range from big losses to bankruptcy. Such stories aren’t exactly encouraging with the steep learning curve in the complex world of stocks. Studies have shown that people are also more contented with not losing, rather than not winning. As a result, fear ensues and stops many people in their tracks to invest.
Another key deterrent is risk and uncertainty. As you already know, every reward begets a certain amount of risk. If it doesn’t, it probably harbors a scam. In the stock market, risks are aplenty. Other than just stock-specific risk that stems from the company of a particular stock, there is systematic risk. Systematic risk unlike stock-specific risk, cannot be diversified. For example, the recent oil glut has impacted many companies in the oil and services sector. Most of these are fundamentally strong companies, but were still heavily affected by adverse market conditions.
Market volatility and uncertainty caused by geo-political risks are also part of the equation. Terrorism, global warming, law and the increasing interconnectedness of the global economy- makes it very much harder to divert risk, especially when you’re new to the game.
These are the 5 reasons that I’ve personally struggled with before I started and some of these reasons are still relevant.
What are some of the reasons that didn’t get you started?
Written by Ethan Ho – from Investingnote [www.investingnote.com]
Investingnote is a free-membership social network platform designed specifically for stock investing. It is the only platform that empowers the stock investing community, through free access of stock data, research reports and technical charts, combined with sharing of investment ideas and up-to-date news. Members can even pitch their stock investing skills by setting stock price targets against real time stock prices. Each member is accorded with reputation points based on the number of followers, likes and posts.