Volatility means the rate at which various asset prices rise or drop over a specified course. Factors resulting in volatile market conditions include investors’ reactions, economic fronts, political issues, company performance, etc. If an asset price remains relatively stable, it is considered low volatile. High volatility indicates quick price fluctuations at extreme levels. There will be a speedy upsurge and a dramatic fall in asset prices within a few seconds. It is difficult to predict the accurate timing of a market downturn. There are several volatility indicators to measure near-term volatility, like, Volatile Index, Bollinger Bands, etc.
Ways to Digest/Tackle Market Volatility
A volatile market is considered detrimental if traders’ moves are directionless. The following strategies can be helpful for stock traders to deal with volatility:
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Make sure the investment portfolio is properly diversified
A volatile market is a time to reconsider an investment portfolio. While an investor reconsiders the portfolio during volatility, the foremost rule is broad and proper diversification. It will never let the investor down and help digest volatility with negative sentiment. They need to ensure that the asset mix in the portfolio is aligned with financial targets as there may be some assets that have gained in value over time but are declining due to market volatility. Demat accounts make it easy to track a portfolio.
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Look at the base for volatility
Stock markets react to every event, low or extreme, at the domestic or international level. It can be government announcements, international transactions, supply and demand, good or bad news about companies, unexpected earnings results, or news about an IPO (Initial Public Offering). Such information or occurrences can result in an imbalance of trade orders due to all buys and no-sells or vice versa. Sometimes even a recommendation by a renowned analyst or entry or exit of institutional investors may cause market volatility. Therefore, traders considered it necessary to verify the news before making a trading decision.
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Avoid leveraging
Traders should avoid extremely leveraged trades in volatile markets. Profits on leveraged positions may seem attractive, but they are not assured and a step in the wrong direction may turn into losses in no time. There are renowned discount brokers in the industry offering free demat accounts, low brokerage, and low-interest rates on margin trading. One can take their subscription-based plans and use the cost-effective leveraging facility during favourable market conditions.
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Avoid the ostrich effect
During a volatile market, investors may overreact and exit from their positions altogether, or they may choose to avoid negative financial news and be patient focusing on the long-term perspective. However, both conditions or reactions are nasty. Investors need to be balanced and seek information to make better decisions instead of getting affected by herd mentality.
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Take the long view on quality stocks
Most investors prefer a long-term investment strategy in the volatile stock market. They take into account the future prospects of investments rather than being guided by noise and fear. What they can do is reconsider their portfolios and sell a part of their portfolio and utilise the funds to reinvest in reasonably priced and fundamentally strong companies with promising growth potential. The strategy is based on the historical assumption that the market conditions become favourable in the near term as markets are meant to rise over time, and fundamentally robust companies can sustain profitably in a volatile market.
Thus, investors can see market volatility as an opportunity and invest in a balanced way. Following strategies, one can tackle volatility. Individuals need to keep their eyes on the long-term horizon. Employing funds for the long term can reduce the risk arising due to market volatility.
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