What is stock market volatility?
In the simplest words, market volatility can be explained when the prices of
securities keep on changing in a short duration of time. One can say such
situations volatile when stock prices go up on the first day, crushes on the
second day, and on the third day, it raises again to some extent. If the prices
of any particular stock stay stable for a considerable time span, the security
has low volatility. For example, you
may have seen situations where nifty may have fallen over 120 points in a day
and recovered on the very next. This can be considered as volatility. Investing
in stocks is a risky business. While investors can earn a high return on
shares, we cannot overlook the volatility that comes with it
High volatility
also increases the VIX ratio (Volatility Index) It measures the amount of
fear in the market as a result of the volatility.
The fear caused by
a volatile market makes investors react in many different ways. Some start to
panic as their investments get riskier and try to sell & exit the market.
On the other hand, there are contrarian investors, who prefer investing only in
situations when others are selling. Anyways, as shares start to lose value,
investors often make hasty decisions that can result in terrible outcomes.
Things you should NOT do when the stock market is volatile!
Here are things
investors should not do when the stock market is volatile:
Try not to Take Hasty Decisions
At the point when markets turn out
to be wild, being a smart Investor you are to keep yourself quiet. Many a time
investors take decisions without much thinking which keep them away from the
potential profit in the future. If you have invested with a goal, you must not
exit at the first hiccup you have received.
Don’t Panic!
The number one
reaction investors have when there is volatility in the market is to panic and
make speculations. It is important not to be influenced by fear and do
something irrational. Investors can consider buying a stock at a lower price
but should not panic-sell. Instead, they should use this period of volatility
to evaluate the stocks in their portfolio.
There are often
many reasons why a person invests in a particular stock in the first place. If
the fundamental values of why you invested in the stock are clear, then you
should remain invested. However, if you are not sure of a particular
investment, meet with your financial planner to decide a course of action to
exit the market.
Remember,
volatility in the market is only short-term, don’t panic-sell if your long-term
objectives of investing in the market haven’t changed.
Don’t believe everything you see on the news!
A sudden ‘breaking
news’ segment on the stock market can cause people to make investment decisions
that can prove to be disastrous in the future. News reports are not always
authentic and often mislead or misguide the investor which can affect the
sustainability of a stock.
News reports about
the volatility of stock markets are usually short-lived and stock prices will
bounce back like a ping-pong ball before you know it. This short-term
volatility is often due to a current event in the economy. Once the event has
passed, your stock price should be back to normal. As a serious investor, be
aware of ‘breaking news’ but don’t follow it blindly.
Don’t buy JUST BECAUSE prices are low!
When there is
volatility in the stock market it is not advisable to invest in the market just
because prices are low. This is because there is no guarantee that a stock with
a low price today will increase in value in the future. In fact, the price may
go even lower and you could end up in a value trap. You need to analyze the
stock’s fundamentals and track record. Look into factors like revenue growth,
profit margin, price to earnings, debt-to-equity ratio, etc as well as its
future potential. If the stock shows a history of riskiness and volatility it would
be best not to invest in them. Don’t be a bottom fisher!
Don’t
Trade Looking at International Markets
During certain
periods, there can be a correlation between local and international stock
markets. For example, a change in the leadership of a country could affect
numerous economies around the world. But statistically speaking, such a
correlation does not exist most of the time.
Volatility in the
stock market is a reflection of individual events in an economy or movements in
the economic cycle. The stock prices are a result of the anatomy of the local
economy. For example, the Dow Jones in the US is completely independent of the
stock prices in NSE’s NIFTY. Hence, investors should not be influenced by
volatility in international markets, there may be various factors that could
affect these stock prices.
Also, Read- How to Make Money Trading Online?
Don’t Indulge in Leverage Positions
Leverage
investment is when a person invests borrowed money to earn a profit. Borrowing
for investment is never a decision of the wise investor. Undeniable is the fact
that such investment can bring high returns but there are times when leverage
investing can make you face great losses.
Don’t rush to invest in volatile sectors!
An important rule
for investors is to study trends in the market before investing. If there are
particular stocks that drive bear markets- avoid these.
A stock that has a
financial risk and a low standard of corporate regulations often leads to
long-term problems and has a low chance of recovering. These stocks will have
short bursts of upward movements but will have a long-term downward trend.
Do a market
analysis of the sector you are investing in, if the industry shows a history of
high volatility- you should remain cautious before you invest too much money
into it.
Don’t put all your eggs in one basket
One of the biggest
mistakes an investor can make is not investing in a variety of stocks. If a
certain industry shows the potential for high returns, it is not a wise decision to
invest all your money here. This is because if a certain economic event has a
negative impact on the industry- it could result in a huge financial loss for
the investor.
It is better to
spread your risk and invest in different stocks that are stable, have a strong
market presence and good growth potential. Here, even if you face volatility in
one of your assets, you have a diverse portfolio of stocks to cover your
losses.
An investor looking
to reduce their risks and control losses should diversify their portfolio and
not invest in too many volatile stocks. Greed can often take over fear and this
can prove to be disastrous. Investors need to perform a thorough analysis of
the stock market before picking stocks to invest in. If they do not have the
bandwidth to do this, they can consult a financial advisor.
