During most difficult times, investors get frightened and begin to question their investment strategies. Investors are very well aware that the market undergoes for time periods of both up runs and down runs. What happens during extreme market volatility? Investors get tempted to drag money out of the market altogether and wait till the sidelines until it seems safe to dive in. Making wrong moves wipe out previous gains and more. Market volatile is mandatory. Due to fluctuating positions of traders, the market moves up and down for a short term. Market fluctuations can bring more uncertainty in stock prices but for a short period. This understanding of fluctuations can help investors to maintain patience in their financial investment.
For investors, this is a solid strategy, but long term investors should know about volatile markets and steps to help them avoid volatility. In this article, you’ll know the steps to do it.
[Also Read:- What Are Equity Mutual Fund | Different Types of Equity Mutual Fund]
Market volatility is inevitable: In financial markets, volatility is mandatory and refers to the presence of extreme and rapid price swings, because it’s the nature of the markets to move up and down over the short term.
Volatile markets are identified by wide price fluctuations and heavy trading. In this volatility, more risk of losing and gaining investment is considered to be at risk.
One way to avoid volatility risk is to stay invested and ignore short term fluctuations.
Volatile market trade with limit orders is always beneficial than immediate orders. Limit orders can limit you to lose additional profit but also extreme loss.
What Is Volatility?
Volatility is a likelihood measure of market or stock rise and fall for a short period of time. Volatility represents a large asset price swing around the mean price. Volatility increases square-root of time as time increases.
It shows the level of risk associated with the price changes of a security. Investors calculate volatility of a security to evaluate past variations in the prices and predict their future movements.
Volatility is often determined by standard deviation or beta. Standard deviation measure of dispersion data in relation to mean. Beta determines dispersion data relative to that of the overall stock market. Beta can be calculated with Market Model Regression.
Types of Volatility
1. Historical Volatility
This indicates the fluctuations in the stock prices in the past. It is used to predict the future behavior of prices based on previous trends. However, it does not provide insights regarding the future trend or direction of the stock price and market.
Historical volatility is utilized to measure the distribution of returns for a specific security or market index over a specified period. The historical volatility of a security. The history volatility doesn’t indicate price direction but states how unstable the price is in the market.
2. Implied Volatility
Implied volatility refers to the fluctuations of the underlying asset. It is a metric to measure the speed of underlying asset prices. Implied volatility is a key metric in the option chain price. It provides forward aspects of possible price fluctuations.