This has been a very tough year for the
Stock Market. When I say Stock Market, I talk about the markets
throughout the world, not just Indian Stock Markets. We are more or less
following the trends of what is going on in the world. Factors ranging
from decline in the crude oil prices, depreciation of Yuan and pressure
on Chinese Economy, slowdown in the economies throughout the world, FED
wows, selloff by the FIIs, to Internal factors like lack lustre quarter 3
earnings of Indian Corporates, Government’s inability to pass crucial
financial bills to boost the investment and economy. Also, euphoria
surrounding the markets after the Modi government was elected in 2014,
finally settling down. How much the markets are influenced by these
causes can be seen by the fact that BSE’s Sensex has lost around 6500
points till now from its peak in Market 2015 and has lost more than 2500
points since the start of this calendar year.
What is worse is, the current volatility
in the stock market wherein one day the markets curelessly swing to one
direction and the next day shifts the gears and swings to another
direction. Specially 2016 has been a roller coaster ride for the stock
markets and it has hurt the bulls and the bears alike. What we have also
seen is all the technical and fundamental analysis going for a toss.
This situation has hurt the retail traders the most. Traders who have
purchased have lost their money and traders who have sold were also
spared by the current volatility in the markets. Today, let’s understand
how to handle the volatility in the stock market and avoid doing
typical investment or trading blunders:
Do not leave open positions for too long if you are a trader :
If you are a trader, avoid sitting on open long or short positions for
too long. Given the current volatility this could prove a costly
preposition in a highly volatile market. Though if you are an investor,
you can ease and relax as volatility would not hurt you much.
Keep investing :
The biggest mistake that retail investors do is to get out of the
market if it comes down and enter back at higher levels. Remember every
downfall in the market posts an opportunity for you to invest. Best
strategy is to invest at lower levels and not get out of the market.
Avoid leveraged positions : Keeping
leveraged position is the biggest mistake that people do in volatile
market. Nothing hurts you more than a leveraged position in a volatile
market. People are forced to square off their positions at a big loss
because they could not pay the margin required to cover the Mark To
Market. On the contrary, this situation would not arise if you do not
use leverage. I am not against using leverage, it is a helpful thing.
Only it should be avoided in volatile market conditions.
Diversify your portfolio :
People should always diversify their portfolio based on industry and
capitalisation. Never ever put all your eggs in one basket. So even if
one stock goes down, others are there to support your overall portfolio.
Focus on good stocks : Try
buying stocks of only good companies with great fundamentals after
thoroughly researching about them. Do not go by tips. Also, do not
invest in companies which are not fundamentally sound, however lucrative
their shares may look. In case of sharp falls, bigger, better companies
are able to recover than smaller ones.
Hedge your positions :
Hedging is the best technique to keep you protected from extremely
volatile market situations. Hedging may minimise your profits but will
help you put a tab on your losses.
Keep booking small profits : Booked
small profits are always better than bigger but notional profits.
Booking smaller profits not only gives more weight to your capital, but
also gives you a bigger cushion in case of extreme situation. Also, the
moment you book profit, you have actually avoided a potential loss.
Hope this article will help you in
formulating your strategy to handle the current volatility in the stock
market in a much better way. Do not hesitate to put up any questions
that you might have. We will be happy to help you out. Nothing can bring
more satisfaction to us than seeing a big smile on the face of our
clients. After all, at Moneypalm, we strongly believe in our philosophy –
“Together We Grow”.