How to Handle Stock Market Volatility

Handle Stock Market Volatility

Let us start the piece with the plain fact that the market undergoes times of strong trends. During times of enhanced volatility, any wrong move can wipe out previous gains or more. Investors can fully protect their assets, by using probability-based trading methods. Clearing the term specifically, volatility refers to extreme and rapid price swings wherein a negative swing turns out to be known as risk. Volatility allows investors to evaluate their investment strategy.

A strategy practiced by many private investors, to move the market consistently in the desired direction is termed directional investing. Contrarily, non-directional investing takes advantage of market inefficiencies and relative pricing discrepancies.

One needs to understand the difference between volatility and risk before deciding on a trading methodology. Volatility is the extreme price swings whereas risk is the possibility of losing a part of the whole of an investment. The delta hike of the volatility of the market is directly proportional to the profit potential and the risk of loss. 

Probability-Based Investing results in a relatively efficient stock price that reflects all known information, which can result in an inefficient stock price that’s not reflected in its beta transferring an additional risk to the investor. Firms that follow the criteria of the analysis are therefore considered more likely to achieve the expected growth level that the market recognizes them to possess.

In Equity-Market-Neutral Strategy, stock pickers glitter because of the ability to pick the right stock with the goal to leverage differences in stock prices by being both long and short in the same sector, industry, nation, market cap, etc. The principle behind the equity-market-neutral strategy is that the gains will be more closely linked to the difference between the best and worst performers than the overall market performance—and less susceptible to market volatility.

A merger arbitrage strategy benefits from the fact that the stocks combined generally trade at a discount to the post-merger price. The Relative Value Arbitrage approach seeks out a correlation between securities and is typically used during a sideways market. 

Event-Driven Strategy is triggered by corporate turbulence, whether it be a merger, asset sale, restructuring, or even insolvency. Such occurrences can temporarily have puffed up or flattened stock prices while the market attempts to conclude and value these alterations.

Investors who seek profits from market volatility can trade ETFs or ETNs that track a volatility index. Volatile times provide an opportunity to reconsider investment strategy. The approaches discussed above can be leveraged by expert traders.