With history as a guide, investors who are patient and disciplined have reaped profits even in bad market conditions
SAJJAD BAZAZ
The stock market is a place which has volatility in its nature. In other words, the market never stays still and shows consistency in experiencing price changes. And that is what actually makes the market volatile. The supply and demand in the market during the day decides the price movement of stocks. Prices generally move higher, if there are more buyers than sellers in the market. The prices of stocks take a hit and move lower when there are more sellers than buyers.
Precisely, market volatility is the frequency and magnitude of price movements of stocks, and the price movement can be both days – upwards or downwards. The bigger and more frequent the price of the stocks swings, the more volatility is witnessed in the market. In fact, market volatility is a typical part of investing and most of the time, it is scary. A heightened volatility is a sign of trouble.
This volatility has failed even the best of the market experts. It has made market analysis the most difficult job for the experts and not to talk of common retail investors. In this scenario, predicting the market has always remained loaded with huge reputation risk for the market experts. It is prone to fluctuation and moves up and down all the time.
Stock market volatility has its own reasons. It is directly linked to events and economic uncertainty and changes in investor sentiment. For example, wars and tensions between countries are some geopolitical risks that significantly affect global economies and businesses. These even bring uncertainty. And this uncertainty usually brings volatility in the stock market. Notably, when we talk of market volatility, we find larger dips in the market occur occasionally. But historically, markets have bounced back after witnessing these drops.
Political risks too contribute to the market volatility. Unstable political environment can cause uncertainty and spur market volatility. During election time, as the rhetoric heats up, there is increased nervousness among investors. However, a breed among the powerful investors who have access to confidential market information misuse it to book hefty profits at the cost of gullible retail investors. Even those who have influence over the investors, particularly the retail investors, also take advantage of the growing political uncertainty by triggering unrest in the market to their benefit.
Notably, extreme uncertainty hits the stock market when there is a significant leadership change in a country because government policies in vogue are straight away at stake. Major policy changes are inevitable and these policy changes can impact the financial standing of businesses, resulting in ripples in the market.
Actually, any bloodbath (disastrous fall of share prices and all sectors turning red, creating so much panic among investors) in the share markets leaves investors’ in a dilemma. Any fall genuinely unnerves common investors, especially those who have boarded the markets for the first time during the Covid crisis. Notably, the coronavirus pandemic and subsequent countrywide lockdown led to a surge of retail investors in equity markets. The story of the markets so far has remained bullish as well as bearish and most of the time this bull and bear fight has left the investors clueless. There are certain basic things which an investor, especially those who are new to this market, must know.
Let us first find the answer to the first question; How should an investor evaluate selling and buying decisions of stocks?
You have to keep it in mind if buying at the right price is vital; selling too is equally a vital link. It’s selling which decides your profit and loss in the investment matters. If you can’t sell at the appropriate time, the benefits of proper buying disappear.
No one wants a loss while being in the stock market. But if it happens, don’t let your ego get in the way of making the right decision. Most of the time, the best course of action is to cut your losses and move on to the next deal.
Meanwhile, selling a stock is triggered by two things – either it may be personal reasons or may be market driven. You may find your risk tolerance reaching to maximum and you immediately off load the stock and reinvest in a new stock. Sometimes an ‘unexpected’ happens and you need cash to negotiate that ‘unexpected’. So you lay your hand on your stock for this financial emergency. Or you may find the stocks in your investment portfolio not matching your moral and ethical values and you sell them.
The stock falling to unexpected levels are some of the market-driven reasons which may prompt you to sell the shares. There may be other valid reasons to sell , but it’s important to evaluate your context of all the alternatives and your consequences.
Precisely, when a sale results in a loss, and is accompanied by an understanding of why that loss occurred, it too may be considered a good sell. Share market experts say selling is bad when it is dictated by fear. They want investors to always focus on selling dictated by rational reasons of valuations and price.
What to do in a bull or bear market?
Investment experts describe a bull market as an ideal condition for an investor to take advantage of rising prices by buying early in the trend and then selling them when they have reached their peak. Even as it’s almost impossible to determine exactly the bottom and the peak of the market, the investors’ tendency to believe that the market will rise can help them to spot the bottom of a bullish trend. Experts opine that during the bull market, an investor can actively and confidently invest in more equity with a higher probability of making a return. In a bear market, the chance of losses is greater because prices when stocks are falling using the technique of short selling. An investor can wait on the sidelines until he feels that the bear market conditions are nearing to an end, only starting to buy in anticipation of a bull market.
In succinct, whether bull or bear markets, both will have a large influence over the investors.
It’s their hard earned money which remains parked in the stocks of different companies in the market. So, the basic thing is that investors should invest their money in stocks of quality companies. As long as an investor does his research and knows the real value behind a company, he doesn’t get scared of its price fluctuations.
Meanwhile, the financial market is flooded with varied financial instruments and it is impossible for an individual to understand everything that is available for them. In this crowd of financial instruments, individuals cannot pick what is best for them.
Let me also have a word about market analysts. Of course, analysts in today’s markets are key to important sources of information. But investors should understand the potential conflicts of interest they might face. Some analysts work for firms that underwrite or own the securities of the companies the analysts cover. Analysts themselves sometimes own stocks in the companies they cover—either directly or indirectly.
So what matters is the investor’s own application of mind while playing in the markets. You as an investor should not exclusively rely on an analyst’s recommendation when deciding whether to buy, hold, or sell a stock. Instead, you should also do your own research about the company whose stocks you are going to purchase. Don’t overstep your financial circumstances while making a decision to invest in the financial market.
However, an analyst may have a conflict of interest, but it does not mean that his recommendation is always faulty. It’s up to you as an investor to assess whether the recommendation is wise for you. You should educate yourself to make sure that any investment you choose matches your goals and risk bearing capacity.
To conclude, investors should stay calm in the whirlpool of market volatility. With history as a guide, investors who are patient and disciplined have reaped profits even in bad market conditions.
Note: the article contains extracts from the author’s forth-coming book – Straight Talk: Contemporary Banking Decoded – to be released soon
(The author is former Head of Corporate Communication & CSR and Internal Communication & Knowledge Management Departments of J&K Bank).
