Every investor invests their savings in the stock market anticipating earning substantial returns and creating wealth. A smart investment plan allows your money to work and earn for you. Investing in stocks can be one of the most lucrative sources of income. While many people have made a lot of money investing in the stock market, many people have also lost a lot of money investing in the stock market.
Stock markets can be highly volatile, and this volatility can also make investing in the stock market a highly risky business.
In layman’s terms, market volatility refers to a high degree of price fluctuation in the prices of stocks and stock market indexes within a short duration of time. Many times, the price of a stock can experience a series of price highs and lows. It can also lead to a sudden rise or fall of stock prices which can continue for days before normalizing. This sudden rise or fall often does not have any logical explanation.
Many investors resort to go into panic mode during times of stock market volatility. Investors are engulfed with a feeling that their investment is at risk of losing its value. Investors often take steps during these periods which they later regret.
Here are some things investors need to avoid absolutely when the stock market is volatile –
When markets turn volatile, a smart investor maintains their cool and does not panic. Many investors make a hasty decision of selling their stocks at whatever price their stocks might be trading. Such decisions are often regretted, and the investor ends up losing an opportunity to make a substantial profit in the future.
While market volatility is temporary, financial plans are designed for the long-term. The market normalizes in a matter of days or weeks, and changing your financial plan can undo and alter the course of your long-term financial goal, depriving the investor of potential future profits. It is important to remember that equity gives best returns when treated as a long term investment.
It is said that the best time to buy a stock is when it is at its lowest, but during stock market volatility, it is not certain that a stock whose price is falling will normalize and rise again. There are chances that the prices can fall further. For instance, in the case of Kingfisher Airlines, the stock of the airline started falling downwards post the flying license of the airlines was suspended. Many investors bought into the shares of the airline expecting the prices to rise, but the prices kept falling until the stock exchange suspended trading of the stock.
While the best time to buy stocks might be when the prices of stocks are low, it is highly advised to not put all your money in buying stocks of a single business entity. During times of market volatility, investors should invest in stocks of different companies across different sectors to minimize their risk and diversify their investments. This strategy also aids in reducing the risk exposure of incurring potential losses in an event wherein the market volatility persist for a longer duration.
As stock market investments are subject to risk, it is advised that investors should invest in the stock market using their own money and never resort to borrowing money to invest in the stock market. Further, investors should not invest in the stock market with borrowed funds due to the additional risk involved of investing in a volatile market.
During periods of stock market volatility, many news reports can mislead and misguide investors. Also, social media can become the worst source of news and information during such times as a wide array of rumors can spread on various social media platforms. Investors should not make their investment decisions based on such misleading reports and rumors and should invest in stocks with strong fundamentals which can bounce back soon.
Every market has its own driving forces, and investors should not make investment decisions of investing in stocks in the Indian stock markets based on events which have taken place in international stock markets. Though at times there can be a ripple effect wherein an event which took place in one market can happen in another market, but these correlated events are often short-term. During times of market volatility, do not rely on making investment decisions solely based on international news and events.
To conclude, market volatility and price movement of stocks during the period can be highly unpredictable. Many investors panic and lose their investments, while the wise ones stay put and enjoy the reaps of their wisdom in the future.
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