5 Equity Trading Tips for Volatile Markets

Investing directly in equity markets, also known as direct equity investing, takes quite a bit of time and energy, not to mention loads of research and patience. Yet it's hard to sit still when the market is sliding. You can't help but think, "Shouldn't I be doing something?" Successful equity investing is about embracing certain resilient rules or principles, the golden rules of investing, if you may. Every investor is different, but there are a few basics that need to be understood and steps that everyone should consider.

What Causes Market Volatility?

Market volatility can be attributed to a variety of factors. Economic indicators such as inflation rates, employment data, and GDP growth play a significant role. Political events, including elections and policy changes, also influence market behaviour. Additionally, global events like natural disasters or geopolitical tensions can cause sudden shifts in market sentiment. Investor psychology and market speculation further contribute to the unpredictable nature of the markets. Understanding these causes is key to navigating the landscape of share market volatility and making informed decisions.

Market Volatility and Market Risk - Understanding the Relationship

The relationship between market volatility and market risk is complex. Market volatility refers to the rapid and unpredictable changes in asset prices, while market risk pertains to the potential for investors to experience losses due to these fluctuations. High stock market volatility often signals increased risk, making investments more uncertain. However, it is also during these times that opportunities for significant gains arise. Investors must balance their risk tolerance with the potential rewards. By comprehending the nuances of what volatility is in stock market, you can better manage risk and capitalise on market movements.

Impact of Market Volatility on Your Investments

Market volatility can have both positive and negative impacts on your investments. On the downside, high volatility can lead to substantial losses, especially if you are heavily invested in a particular sector or asset. It can also cause emotional stress, leading to impulsive decisions that further exacerbate losses. On the upside, volatility presents opportunities to buy undervalued assets at lower prices. For long-term investors, market downturns can be an ideal time to strengthen their portfolio. Recognising the dual nature of volatile market can help investors navigate through turbulent times with a more balanced approach.

Tips to Trade in a Volatile Market

1. Understand What You Are Buying

This is the most basic prerequisite for investing in equities. You must have a good understanding of the product / service offered by the company - where the product finds usage, the manufacturing process, the value-add, input costs. If you find the product / service too complex or too good to be true, it is better to give it a miss even if it appears exciting. If you feel remorse later, remember Warren Buffet who refused to buy technology stocks in the dot com boom in 1999 and lost on some gains initially only to find redemption in the crash that followed.

2. Think Long Term

If you are going to need your money in a hurry (within 3-5 years), equity markets may not be the right place for you. While you are investing for the long-term, you instinctively adopt certain traits like giving the daily noise a miss and looking at companies with a more serious, long-term perspective. You automatically align your point of view with the company’s point of view. So if the company has set up a plant and expect returns to start reflecting in the stock price three years later, that’s also how long you will wait for the stock price to start moving up.

3. It’s not About Keeping up with the Neighbours

Investing is a painstaking activity about identifying the right companies. It involves understanding the business of the company and the opportunities and threats it’s likely to witness over time. This analysis does not get simpler because your friend or colleague bought a specific company or because a company is in the benchmark index or because it was recently in the news. In other words, there is no shortcut to study and analysis before investing. You cannot expect to identify a good company through the choice of your friends or the benchmark index. To quote Sir John Templeton, “If you want to have a better performance than the crowd, you must do things differently from the crowd.”

4. When Markets Are Misbehaving, That’s The Time

A lot of individuals are flustered with market volatility. Their response to market irrationality is with some irrationality of their own – so they end up selling in panic or avoid markets altogether for a while. You may regret this response in the future.

When stock markets are in panic mode, that’s the time you must add to your portfolio. But disclaimer, be prepared to suffer additional short-term pain, but do not wince, instead increase your positions so long as you have conviction. To re-quote Sir John Templeton – “Invest at the point of maximum pessimism.”

5. Use Stop Loss

To further enhance your strategy in a volatile market, consider utilising stop-loss orders. Stop-loss orders automatically sell your assets when they reach a certain price, limiting potential losses. This tool can be particularly useful in a highly volatile market where price swings are unpredictable.

Final Takeaway

Successful equity investing is about following certain golden rules:

• Understand what you are getting into by reading up on the company’s products and services, the end users, manufacturing process, basic input costs.

• Think long term while investing in equities – align your investment horizon with the stated break-even or profitability time frame of the company.

• You do not stand a chance of beating the crowd by investing in the same stocks as them – you need to study harder and identify companies with markedly superior advantages.

• Instead of getting cowed down in the face of volatility, increase positions when markets are pessimistic