During the times the stock markets are volatile, a number of investors get into a panic mode and start doubting their investment strategies. This holds true with new investors who often get tempted to pull out their investments and wait for the right time to dive back. One thing which every investor needs to know is that the market volatility is unavoidable. It is the nature of the stock markets to have highs and lows even in short duration and trying to time the stock market during this time is hard.
The best solution in such volatile situations is to aim for long term investments and ignoring the short term market fluctuations. For many experienced investors this is a proven strategy, but at the same time, they also need to have a clear understanding of the markets and the tips that can help them overcome any losses they might have.
Why the Stock Market Is Volatile
Before we study the reasons that cause volatility in stock markets, let us understand what volatility is. Volatility is a measure of the market’s tendency to fall or rise sharply within a short duration.
Volatility in stock markets can occur due to high price fluctuations and heavy trading. Such a situation often occurs due to imbalance of the trade orders that happen only in one direction. Experts also suggest that volatility also occurs when there are economic releases, launch of a popular IPO, news related to a company, any recommendation from a popular analyst or due to results of unexpected earnings. Some traders also blame the intraday traders, institutional investors and short sellers for the high volatility in the stock markets.
Financial experts who study the markets based on behavioral approach say that volatility also occurs due to the change of mind of the investors. By such suggestions, it is clear that there is no clear consensus on the exact causes of volatility and hence, it gets important for investors to learn investment strategies for volatile markets.
Tips for Investors in Volatile Markets
One strategy implemented by investors to deal with stock market volatility is to stay invested and ignore the short term market movements. Implementing this can be harder than it sounds as during a bear market, one’s portfolio can show a loss of 50% or even more.
Traders also need to avoid the misconception on the buy and hold strategy as even long term investments need a lot of study and understanding of how the markets are driven by the fundamentals of corporate companies. If you have made investments in the stock of a company that has a strong balance sheet and has consistent earnings from years, your investment will not get affected with the short term market fluctuations. Such down fall in the markets is indeed a good opportunity for investors to buy the stocks if the company is good for long term investments.
Advice for investors during crazy stock market volatility
While one can find a number of advises on how to deal with stock market volatility, investors need to be aware of certain things. They are:
Volatile markets often see high volumes of trading and this can at times cause a delay in execution of orders. Such situations can also cause the execution of orders at a different price than the market price quoted.
Traders can also have slight difficulty in executing their trades due to the limitations in the capacity of the systems. Even when trading online, one can experience difficulty in accessing the account and hence alternate methods like calling your broker or faxing them the order 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 kind of orders they choose. When placing an order, investors can take the aid of limit orders as they help reduce the losses that can occur due to incorrect quotes.
As a conclusion, it can be said that investors have to be aware of any potential risk that can occur during stock market volatility. So, the experts suggest staying invested if you are confident about the investment strategy you have implemented. On the other hand, if you have decided to trade in volatile markets, it is important to be aware as to how the sudden fluctuations can affect your trades.