Volatility is the situation in the market when the stock prices tend to rise or decline in a short span of time. This is the condition which speculators usually like the more. The one who has earned in the phase feels himself smart and lucky but the one who has lost in the market tends to put his decision of investment on doubt. This stands true to a larger extent for the first time investors. You need to acknowledge the fact that volatility cannot be completely eradicated from the market. It is the nature of the market to move up and down and hence it cannot be stable. This instability and inconsistency of the market gives rise to risk. However, at the best you can only make and implement strategies to deal with the marker volatility in an efficient and effective manner. Let us understand the various aspects of volatility and the strategies to deal with market volatility.
How to Calculate Volatility?
Volatility is the deviation from the current market rate, i.e. it is a statistical measure to identify the tendency of a stock price to go up and down. Higher the volatility, higher will be the risk. Volatility is measured by standard deviation, which is a statistical tool to identify the variation or deviation from the expected value. Volatility is also measured by variance, which is the square of the standard deviation. If the standard deviation is less than one, the stock is said to be less volatile and if the value of standard deviation is more than 1, then the stock is said to be more volatile. Standard deviation is one such tool using which you can even set a comparison between the stocks of two companies in the same industry or may be from the different industries or sectors or segments.
How to deal with volatility?
The simplest way to deal with the volatility is to avoid it completely. In other words, you can ignore the short term fluctuation taking place in the market and stay invested by holding the stock. However, if you feel that the up and down movements in the share prices is not for short term and see the market conditions not favourable, then you have to take the decision accordingly and need to act. Usually people have a misconception that if you will hold a stock for very long period of time, say 20 years, then you will be able to earn a high appreciation. But unfortunately, this is only a misconception and the results vary from stock to stock. For some stocks, it may hold true whereas, for others, it may not work at all. There are so many things that, you as an investor need to do prior to investing in a stock for long term. If you have done your homework well and by looking at the fundamentals and other necessary details you are confident that the company has potential to grow and that in the long run the company will be able to survive and provide a consistent return to its investors, then you should surely ignore the short term fluctuations in the market and stay with your holdings in the company.
What else do you need to know?
As an investor, you should know as to how the securities are executed when the market conditions are volatile and that the prices are not stable. The things that you should know are as follows:
- Delays – When the volatility captures the market you will find the large volume of transactions taking place in the market. Due to the high volume, you will encounter delays in execution of these transactions. And because of this delay, your order may get execute at a price which is far different from the one at which you have placed an order. However, with the advent of online dealings, the pressure has reduced to a certain extent and is still prevalent in the market.
- Availability of alternatives – When there are large trading volumes due to volatility, there will be a bright chance of high traffic at firm’s website which may again cause delay in either taking your order or in executing your order. Be sure that the firm offers other alternatives to transact – telephone, fax, etc.
- Differences in the quotes – Always remember that in conditions of volatility, even the real time quotes tend to vary with the current market prices. Therefore, the difference in the quotes at which the orders will be executed is bound to occur.
The best way to avoid discrepancies in the rates, specifically in volatile market conditions is to transact on limit orders. Though the cost of transacting on limit orders will be high but it is still recommended.