Trading in a volatile market
May 16th, 2007 Ogbuotobo Chuks || chuks@stockmarketnigeria.com
By Ogbuotobo Chuks
No doubt, the Nigerian stock market is a very volatile one as the swings that characterizes the market rightly suggests. This being the case, what then do we as intelligent investors that we call ourselves do? A volatile market is inevitable as there will always be profit takers in the short term that will induce this effect. Lets read on and see if we can truly absorb this trend, and profit from it in one way or another.
What is volatility?
Volatility is a statistical measure of the tendency of a market or security to rise or fall sharply within a short period of time. It can be measured by the standard deviation of the return of san investment.
A wide price fluctuations and heavy trading characterize volatile markets. They often result from an imbalance of trade orders in one direction. Some people attribute this trend to things like company news, a recommendation from an analyst, a popular initial public offering. Others say it is due to day traders, short sellers and institutional investors.
Its clear that there is no consensus on what causes volatility, but what is clear is that investors must develop ways to deal with it.
Stay invested
One way to deal with volatility is to avoid it altogether. This means staying invested and not paying attention to the short-term fluctuations. Sometimes this can be harder than it sounds- watching your portfolio take o 50% hit in a bear market is more than many can take.
One common misconception about a buy and hold strategy is that holding a stock for 20 years is what will make you money. Long term investing requires homework because markets are driven by corporate fundamentals. If you find a company with a strong balance sheet and consistent earnings, the short-term fluctuations won’t affect the long-term value of the company. Infact, periods of volatility could be a great time to buy if you believe a company is good for the long term.
Important information
Volatile markets are associated with high volumes of trading, which may cause delays in execution. These high volumes may also cause executions to occur at prices that are significantly different from the market price quoted at the time the order was entered. We as investors should always ask brokers to buy at a fixed price to maximize returns.
Also, the type of order you choose is very important when the markets ae in a swing. A market order will always be executed, but in fast markets you might be surprised at what price you get the shares.
Here, a limit order should be placed with the broker like we said above, to buy or sell at a predetermined price. Limit orders typically cost more that market orders but are always a good idea to use because the price at which you will purchase or sell securities is set
Conclusion
Investors need to be aware of the potential risks during times of volatility. Choosing to stay invested can be a great option if you’re confident in your strategy. If however, you decide to trade during volatility, be aware of how the market conditions will affect your trade.
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