Friday, 3 May 2013

Stock Investments and Market Volatility

While going through stocks and stock market related news, we may have come across many terms which indicate the confusing and rather indecisive phase of the stock market or individual stocks. It is useful to understand the nature of such situations and resulting price fluctuations in stocks.

  • Such phases are generally the result of lack of clarity in policies.
  • They are a result of inability to interpret any news relating to a the concerned company.
  • They are caused due to different perceptions by people about any recent developments about the company or the market situation in general.
  • Speculative short-term trading. 

The above situations lead to fluctuations in price movements of stocks and we say that the market is very volatile. Such a volatility in market is generally perceived to be a boon for speculators and traders.

For serious value investors in stocks also, such volatility gives opportunities of investment. At this point it should be clarified that by value investor, we mean somebody who invests in stocks by believing in the intrinsic value of the company and the relevance of its products/offerings and so is essentially a long term investor.

To make the best use of market volatility we must first understand the nature of such volatility. There are two basic premises which the value investor should always remember and which will help in making use of market volatility. They are :

  • Volatility is essentially a temporary phenomenon. It will last so long as the situation causing it is unclear. Once clarity comes, the volatility ceases.
  • Good companies are not built overnight. Companies which are strong internally will hold on after the volatility ceases and the stock price will reflect their strength in due course of time.

All that remains now is to select good companies to invest in. Remember that we are speaking of investments in the long term, typically 5yrs. For beginners to stocks and those learning to invest in stocks we have given some good pointers in our Beginners Section and Useful Concepts section which will help in selecting a good company. Assuming that you have selected a good company with strong fundamentals and good financial structure all that remains is to wait for the prices to fall to a comfortable level.

A volatile market offers many such opportunities in the form of dips in price. We can buy the stock at a safe low price. Since volatility is temporary, the price fluctuations will cease eventually and the real value of the stock investment will start to reflect in its price overtime. Assuming that the initial choice of the company was good, investors can expect good profits. When learning to invest in stocks, it will be difficult at first to judge the right time to purchase a stock. Overtime, with practice, we will learn to use market volatility to purchase at a better price and become better investors.