If you’re into online trading, then it is crucial that you know about market volatility. It plays a huge role in determining whether your trades are profitable or not. In this article, we’re going to be taking a look at market volatility and how it impacts the stock market and the sentiments of the investors. So, let’s begin by first trying to understand what market volatility is.
Volatility is the term used by traders to denote the speed at which the price of an asset changes over a period of time. The higher the volatility of an asset, the greater the degree of price changes are likely to be. And similarly, the lower the volatility of an asset, the lower the degree of price changes are likely to be.
That said, many individuals tend to associate volatility with falling share prices. However, that’s not the case. High bouts of volatility can also lead to a sudden and sharp spike in the prices of an asset as well.
There are several things that cause market volatility. Some of them are - geopolitical tensions, economic factors, changes in the interest rates, and fiscal policy changes are a few factors that can lead to high volatility in the stock market.
Although high market volatility cannot be fully associated with a bearish or a negative market, in most cases, the market does tend to fall. And on the contrary, during times of low market volatility, the market usually tends to rise.
And since high volatility would mean higher levels of risk and an increased possibility of a loss, it affects the investors’ sentiments in a negative way. Sustained bouts of high volatility will in most cases lead to a huge fall in the stock market due to the build up of fear amongst the investors. Afraid to get caught on the wrong side of the stock market, investors generally tend to sell off their holdings, which will trigger a bear market.
Similarly, low volatility would mean lower levels of risk and lower possibility of a loss. This ultimately has a positive impact on the investors’ sentiments. During times of low volatility, investors generally tend to invest in the stocks of companies, triggering a market upswing.
To put it simply, high volatility is associated with negative investor sentiment and low volatility is usually associated with positive investor sentiment.
Volatility is an excellent indicator of the stock market’s state and the sentiment of investors. Sometimes, periods of high volatility leading to a market correction can also open up opportunities. You may be able to purchase shares of fundamentally strong companies at lower valuations. That said, before you go ahead and start trading in the stock market, always take the market volatility into consideration first. This way, you can make informed trading decisions.
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