During volatile times, new investors get disturbed and start to question their own investment strategies. This holds true for new investors who get easily affected by the stock market volatility and wait for the right time until it seems safe for them to dive back into the market.
One thing that investors must be aware of the fact that the stock market volatility can’t be ignored. The basic nature of the stock market is to have highs and lows over the short term. During tough times of volatility, the one-stop solution is “to go for long-term investment and ignore the short-term market fluctuations and gains”.
Many experienced investors must be aware of this strategy but also at the same time, they need to have a clear understanding of the volatile market which helps them to overcome any losses.
Before taking a dig deep into investment strategies for investors, let’s have a clear understanding of stock market volatility and its causes:
What is the Stock Market Volatility?
Stock market volatility is simply a statistical measure of the tendency of a stock market that may rise or fall short at a specific point in time. Volatility occurs due to heavy fluctuations in stock prices and heavy share market trading. Such a situation occurs due to a heavy imbalance of trade orders that happens only in one direction.
Also, the stock market volatility occurs when there are many ups and downs in economic activities, launching of a well-liked IPO, news related to a company and more.
Other reasons behind the stock market volatility are intraday trading, institutional investors, short-sellers for the high volatility in the stock market.
Besides the above reasons, there is also a behavioral approach that says volatility also depends on the change of mind of the investors. Generally, upward volatility is often considered good by investors, while on the flip side, downward volatility makes investors panic which in turn leads them to radical decision making.
Stock market volatility is usually measured by the standard deviation of the return on investment.
Tips for Investors in a Volatile Market
One of the best strategies implemented by investors to deal with the stock market volatility is to stay invested and ignore short term market fluctuations. Implementation of such things can be harder than anyone can imagine as, during a bear market, one’s portfolio can show a loss of at least 50 %.
Traders also need to understand the misconception on the buy and hold strategy as such types of investments require a lot of study and understanding how the markets are handled by the fundamentals of a company.
If you have made investments in those stocks in a company that has a strong balance sheet and consistent returns, then your portfolio won’t necessarily get affected by the short-term fluctuations. In fact, such a downfall of the stock market is a good opportunity for the investors as they can buy more potential stocks at a lower price.
What do Investors need to do during crazy stock market volatility?
A volatile market often seeks a high volume of trading which in turn causes a delay in the execution of orders. Also, due to stock market volatility, the execution of orders occurs at a different price than the market price quoted.
Traders also face slight difficulty in executing trades due to the limited availability of systems and internet access. Even when traders do online trading, one can experience difficulty in accessing the account and hence alternate methods such as calling your broker or faxing them are to be considered.
When the markets are not moving in the direction predicted or not in their normal way, investors need to be careful about the stocks they select. Thus, when placing an order, investors can take help of orders as they help to minimize the losses that can occur due to incorrect quotes.
Diversify Your Portfolio
Diversifying the portfolio can turn out to be a successful stock trading strategy. Diversifying simply means the proper mixing of stocks from different sectors. This strategy can help the best in eliminating the associated risks of the stocks.
A portfolio having stocks from different sectors such as the steel sector, the technology sector, pharma sector will diversify your risk to a greater extent. In case, if there is any fall in one particular sector, you are blessed with other sectors that will help you to regain profit. While selecting a portfolio, it is always suggested to use technical tools for stock analysis and only make a diversified portfolio.
Risk management can turn out to be one of the most efficient strategies, especially during stock market volatility. Being aware of such situations can help you to protect your losses. Also, volatility causes the downfall of stock prices which acts as a good opportunity for the investors to add more stocks to their portfolio. If you have high beta stocks, you can easily manage the risks by swapping the risky stocks with safe stocks.
Have Cash in Hand
It’s not necessary to keep all your money invested in the stock market. Keep some money in hand so that you can grab the opportunity if volatility hits the stock market. As volatility occurs in the stock market, the stock price falls drastically and this is the time when cash in hand comes handy.
Purchasing shares during such times when prices are at the bottom can help you make high profits in the long run.
Stock market volatility is inevitable and therefore whenever you enter a stock market, come with the acceptance that every day would not be a good day for a portfolio and when the volatility strikes, it can get worse.
By reading the above points, you can handle the situation in a much better way.
It can be said that investors have to be aware of any potential risks that can occur during stock market volatility. Hence, the experts suggest staying invested, if you are confident about your investment strategy. If you have decided to trade in a volatile market, it is important to be aware of how sudden fluctuations can affect your trades.