The stock market is a public market where the buying and selling of stocks take place. In other words, it is a market where publicly-traded shares can be traded. Investors find the stock market as a platform that provides a great opportunity to join an established business while reaping the rewards without the high risk of being a part of a new unproven business.
Besides this, developing companies or enterprises can gain access to a significant amount of capital by selling part of their ownership in the form of shares to fund their activities. This represents a win-win situation for all involved parties. Despite this, the stock market is renowned for its volatility. How does this affect stock prices? To answer this and more, this article will provide an insight into what volatility is and how to trade stocks in the presence of rising volatility. Keep on reading!
What is Stock Market Volatility?
Stock market volatility represents the extent to which the prices of stocks can rise and fall over a specific period. Simply put, stock market volatility measures the extent of risk that investors are likely to experience. Higher stock price volatility, which implies higher risk, can help investors make informed decisions as they estimate any future variations.
What Drives Stock Market Volatility?
The volatility of the stock market is driven by several factors, some of which are introduced as follows:
Political and economic factors
The roles that governments play in regulating industries through policies cannot be denied. The impact of their legislation and trade agreements can be felt in the economy. For instance, the ongoing Russia-Ukraine war sparked sudden reactions from investors, which affected the stock prices.
Industry and sector factors
Volatility can be driven by certain events within an industry and sector. These events could be internal or external. Take, for instance, when a significant weather event occurs in an important oil-producing location, stock prices of companies involved in oil distribution may rise.
Company performance
Volatility can also be restricted to the performance of a company. For instance, if a novel product is being released, the news can encourage investors to purchase more stocks, raising demands and stock prices, in the process. On the other hand, a scandal, data breach, or any bad behavior within an organization can trigger more sales of stocks. This reduces the demand for stocks, as well as the stock prices. Depending on how large the company is, this performance can have a bigger impact on the general stock market.
The Best Ways To Trade Stocks Successfully
Volatility can sometimes be an opportunity, and not necessarily be a bad thing. Indeed, it can provide entry points from which traders can take advantage. For instance, an investor may wish to purchase a stock for $100 that was worth about $200 a short while before then. Purchasing stocks in this manner reduces your average cost per share. This helps you improve your performance when the market becomes more stable.
Similarly, when a stock rises quickly, investors can make the most of it by selling out. These proceeds can then be invested in other areas that can bring about better opportunities. When you invest in a volatile market, valuations can become more attractive. This can help investors generate high returns in the long term.
Taking a long-term view is quite important
Long-term investors often worry less about volatility. After all, volatility is a measure of the sudden variation of stock price. There are several reasons behind this investment strategy.
First, the timing of the market is often difficult. It is not an easy task to predict the market conditions. When investors attempt to predict the market flow, there is often a risk of purchasing high while selling low. This bad timing can hurt your investment return, particularly during volatile periods.
Conclusion
The volatility of the stock market is a key thing to remember. Besides this, it is normal for the market to experience swings in opposite directions and several factors can contribute to this significantly.
You should not exit your investment based on volatility. By understanding how volatility works and what causes it, investors can make the most of any investment opportunity that volatility provides to deliver better long-term results.
