- What Is Volatility?
- How to trade in Volatile Market
What Is Volatility?
Before knowing about how to trade in Volatile Market it is important to understand what a volatile market is. Volatility is the statistical measure of the market or security tendency of a market or security to rise or fall sharply within a short period. This is usually measured through the standard deviation on the return of an investment. Standard deviation is the statistical concept that implies the amount of variation or deviation that might be expected.
In the financial market, return on investment is made through price movement. The speed or the degree in the changes of the price is known as volatility.
One of the biggest advantages of volatility, is the fluctuation helps in adding the profits if done with the right strategy, On the other side, a higher risk is involved too. If the volatility spikes it is quite possible to generate an above-average profit but the risk involved is you may lose a good amount of capital. The duration of time is relatively short for both gain and loss.
How to trade in Volatile Market
With a proactive approach and patience, you can be able to manage the volatility for your benefit while minimizing risks. Let’s discuss, how you How to trade in a Volatile Market?
Do Not Panic
The first and foremost rule to investing in a volatile market is not to panic about the market trend. Plan your strategy and investment in a way that helps you gain profit. Study the market before investing in any stocks, and choose the right approach to invest in the volatile market.
Stay Invested – Think about long term investments
Short-term losses can result in triggering the anxiety further but don’t let your emotions drive your investments decisions. These emotional decisions can cost you a fortune. One of the ways to survive in a volatile market is by focusing on long-term results rather than the daily bumps along the way. Trading can be difficult but it may result in creating better opportunities for you in the future.
Focus on Good Companies Stocks
Always find a good company when you are looking to invest in the long term. Analyze fundamentals of the company such as sustainable growth, solid valuation frameworks, robust profits, positive earnings revisions, and strong momentum as compared to the other related companies.
Look for the relatively priced companies that can cover their debt burden and cost of capital that isn’t overleveraged. Look for companies with a strong track record of earnings growth and high earnings quality.
You need to invest in a good company as it removes the need to market time Growth Vs. Value. The reason behind this is your portfolio ultimately will be made up of both and should benefit in all market cycles. It will result in pure growth or pure value.
Diversify Your Investment
You need to diversify your portfolio of investments, this is one of the best ways you can keep overall investments stable during a volatile market. Also, the diversification here implies spreading your investment across different asset types, spreading out your risk. This often happens that one investment sector may go down but the other one is in the upswing. This way you can cover profit and losses. By diversifying the upswing and downturn you can balance it out easily. Moreover, this will limit any kind of substantial loss if something catastrophic should happen to one of your investments.
High Dividend Stocks
Retail investors should always invest in high dividend-paying stocks. The reason is even if the underlying share falls they can still earn steady dividend income which will be beneficial in the long run. On the other hand, the rise in the dividend payout ratio over a longer period indicates that the fundamentals of the company are strong. Moreover, equity mutual fund investors should always look around the dividend yield schemes for higher tax-efficient returns. The reason behind this is they invest in the stock of dividend-yielding companies with a preference for firms that have a consistent track record of paying dividends at the time of investment.
The most volatile stocks have high-risk factors. So every investor has a set amount of capital to invest in the share market which implies that every investor has a risk-taking capacity. One needs to plan their strategy before investing in the stock market according to the trend followed. Always remember to invest according to the risk you can bear, the stock market is subjected to risk and the volatile market may end up giving losses too.
When in doubt, wait it out
If you are not sure about where the market is heading, sitting on the sideline is a good option. The period of volatile markets comes and goes in short. It is not so often and is usually short-lived. Sometimes it is a wiser decision not to trade at all in the market. There are many opportunities in the share market.
Have Cash in Hand
Stop exhausting your capital in the share market. You should try avoiding the situation of selling stock to meet your ordinary expenses. No matter how strong your knowledge for the investment is or how good your strategy is, always remember you have a cash cushion to ensure stability. Moreover, you need to allow yourself to make thoughtful decisions. Also if you have plenty of cash on hand you will be able to position well to take advantage of the market in the downturn by picking up bargain investments.
Always Invest with help of a Research Analyst
Whenever you invest in a volatile market you can take help from a research analyst. Because research Analysts can help you make wiser decisions when the market is volatile and help ensure you don’t let short-term worries keep you from realizing potential long-term gains.
Conclusion – how to trade in a volatile market
It is important you should choose the right strategy before investing in the stock market, especially a volatile market. You should keep patience and not deviate from your financial goal. A volatile market may negatively impact your stock for a short duration, but you may get better returns for the long term. Portfolio diversification can minimize your investment risk. You may avoid the major downfall of Investment by investing in blue-chip stocks.
You should always invest in the stock market with the help of a SEBI Registered Research Analyst. They will help not only to invest in the right stocks but also update about market knowledge.