Stock market volatility is one of the most important concepts to determine whether it is favorable for investors or not. Volatility and risk are inherent in the stock market but profit opportunities are also there. Market volatility actually offers money-making opportunities to the patient investor.
Volatility represents the price movement of financial securities and how fast prices are changing in the stock market. You will notice swift increases and dramatic falls in securities’ prices.
Volatility can benefit investors in the long-run. Conservative investors buy stocks in the volatile market at lower prices to produce returns in the long run. But for short-term investors, volatility is crucial.
Volatility and Long-term Investing
You can take advantage of volatility if you believe after your research that a company is performing well and will be good for the long-term. You need to find a company with consistent earnings and a strong balance sheet for investing because short-term price fluctuations would not impact its long-term value. But remember, long-term investing also requires homework and investing results depend on where you get data.
Volatility and Options
Options gain value in the volatile market and will be a valuable addition to an investment portfolio. If you buy a put option, where you have the right to sell the underlying asset at a predetermined price, you need to wait for falling prices so that you can buy the underlying assets at lower rates.
Put options are used to hedge existing investment portfolios in the volatile market using various options-based strategies.
Volatility and Intraday Trading
You will find wide price fluctuations and heavy trading in the volatile market. You may notice one direction trades for example all sales and no buys which creates an imbalance of trade orders. During volatility, Mostly people do intraday trading for profits. Some market-maker firms discontinue normal automatic trade executions and handle them manually.
There will be high volumes of intraday trading in the volatile markets that cause delays in trade execution. There may be a significant difference between the market price quoted to you while placing an order and the price at the time of executing an order. Even the number of shares available along with real-time quotes can bring price discrepancies during volatile markets. Ask your broker how market makers are handling the order in this volatility.
What is Demat Account?
Demat account is required to hold financial securities you purchase/sold in the dematerialized/electronic form that ensures the safety of your financial securities.
What is Trading Account?
Trading account is an online platform required to trade securities. It facilitates transactions to buy and sell financial securities. There is no paperwork involved in trading in the stock market. It is the primary account of intraday traders.
Volatile Market and Order Type
As you have seen that major discrepancies can be found during volatile periods, choose the type of order carefully. You need to place a limit order instead of a market order.
A limit order is placed to buy or sell a pre-decided number of stocks at a specified price. You may find limit orders slightly more expensive than market orders.
Limitation of limit order is that it will not always be placed. On the hand, market order guarantees you the order execution but in fast markets, but there may be price discrepancies, hence losses. Better to avoid market order.
The Bottom Line Investing will be proved a great option if you invest cautiously. You cannot time the market so, better to maintain a long-term horizon. Be aware of potential risks in the volatile market. Keep investing only if you have enough experience in the stock market and if you are confident enough about your strategy.