Stock market volatility and the dramatic movement of share prices is prevalent nowadays. It is primarily triggered by news, followed by the reaction of investors and traders. Financial markets hate uncertainty. In these uncertain times, it is not easy to make investment decisions or make trading calls. That leads to volatility.
Volatility is measured using standard deviation. It is also measured by looking into the variance concerning annualized return for a given period. In either of the cases, the higher is the value, the more volatile are the prices or the returns. A high standard deviation value means prices can dramatically rise or fall. In most cases, a 1% surge in market indexes denotes market volatility.
What Makes The Market Volatile?
Volatility is predominantly driven by: (a) profit performance of a Company’s Stock for a specified period, and (b) Inflation Rate.
Higher earnings reported by listed companies usually result in better returns to investors. However, it is also about the future. Long term growth is a crucial contributor to market returns. Share prices can get wobbly if investors and traders see any threat to long-term growth in the business and profits.
The second factor is the inflation rate. That disrupts the rising trend in share prices. Any threat of inflation could lead to higher interest rates. That reduces the risk-taking ability of investors and traders.
These two factors, growth and inflation, create uncertainty.
What should an investor do to book profit in a volatile market? Is rebalancing the portfolio an option?
While the return of volatility may be the bad news for some, aspiring intraday traders generate profits. They follow specific strategies, such as:
- Start small. Losses can be limited by limiting the size of the trade. With the increasing experiences, investing more considerable sums may prove less risky.
- Dump the practice accounts and experience the actual trade in surfing the market waves.
- Stay selective. Limited quantity and thoughtful trade may help.
- Stick to your trading strategy instead of going impulsive.
- Track your trading performance with a daily log. It helps to eradicate the repetition of unsuccessful methods and practices.
- Stay gratified with small profits and consistent trade.
Rebalancing portfolio is another prominent tool to manage volatility. It gives a better risk control mechanism ensuring that the portfolio is not concentrated on a single investment category because not all the asset classes perform in the same way.
An investor’s risk attitude and risk capacity are the preludes to build up an effective asset portfolio. The fundamental principle lies in the relationship between age, risk appetite, and asset allocation. Equity is always considered a high-risk investment tool, whereas debt instruments and fixed income securities denote the safer bet. It is prudent for investors, who panic a lot in a declining market, to go for a conservative portfolio.
Volatility Index in Indian Stock Market:
India VIX is the volatility index of the Indian Stock Market, based on Nifty Index Option Prices. When the market moves steeply up or down, the volatility index tends to rise. And, as the volatility subsides, the volatility index declines. A high VIX represents the fear and panic present in the Indian market and a precursor to a sharp fall in the market. Low VIX indicates a stable market where the volatility is under control.
The importance of volatility is widespread in financial economics. Equilibrium prices obtained from asset pricing models are affected by the changes in volatility. Investment management lies upon the mean-variance theory, while derivatives valuation hinges upon reliable volatility forecasts. Portfolio managers, risk arbitragers, and corporate treasurers closely watch volatility trends as changes in prices could significantly impact their investment and risk management decisions.
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