Market volatility - stock market volatility explained
|How does it affect my investment?|
|So, what's an actual real-life instance of it?|
|I thought he just spent most of his time on Twitter. How is he so rich?|
|Is one person's loss another person's gain?|
|So, how was this a positive from an investment POV?|
|What's an example of when it goes wrong?|
|So, how did this go wrong?|
|Is it worth the headache?|
Volatility is an investment term that means a certain market or type of investment is moving in an unpredictable and turbulent way. Several factors can cause the price of a stock to increase or decrease in price dramatically. Usually, the main driving factors are:
● World events.
● The performance of the company as a whole.
● An increase in interest rates or high inflation levels.
When you hear about volatility on the news, it is commonly attached to downward or negative trends. However, it can also apply to stocks or markets exploding in value. Today we will find out what it means and how it applies to real-life examples in today's stock markets. We will also explore how you can potentially shield yourself from its damaging effects.
How does it affect my investment?
If you are planning on holding stocks for several years, you will experience volatility at some point. It could be positive or negative, but it is more or less guaranteed to happen. The important thing is to ride the storm. If it's lucky enough to send your investment past your selling price, it would be wise to stick to your original plan and sell up.
Many people have tried to time the top and lost out because they switched the goalposts at the last minute. It can be easy to allow emotion to cloud your judgment, and in the case of high-rising stock, it can seem like it will continue to rise. However, as history has shown us, what goes up, usually comes down.
So, what's an actual real-life instance of it?
A volatile stock market provides opportunity. For example, in September 2018, Elon Musk appeared on the Joe Rogan podcast and smoked cannabis, causing the Tesla stock price to plummet 9% in 24 hours and two executives to resign.
With the benefit of hindsight, it's clear that this wouldn't be the end of Tesla. They are the market leader in an industry slowly replacing oil-powered vehicles as the most dominant transport industry.
On this day, Tesla went from $20.18 a share to $18.70 a share, causing panic amongst some traders. It now trades at over $250 a share. So despite the short-term negative volatility, the long-term positive volatility was enormous. This is now reflected in Musk's net worth as the richest man on Earth.
I thought he just spent most of his time on Twitter. How is he so rich?
He is the richest person on Earth by quite some distance. Despite this incident, bizarre social media outbursts, and the detrimental impact of covid-19, the company has gone from strength to strength.
This just shows just how strong of an investment the company is. Negative volatility can result in an opportunity to purchase at a more attractive rate. Positive volatility can allow you to cash your investment and maximize the return. However, it is crucial to point out that you must perform your own market research and invest what you can afford to lose so that you don't put yourself in a troublesome financial position.
Is one person's loss another person's gain?
Regarding stock market volatility, it can be used to your advantage. Covid-19 can show how much negative volatility can be used to your advantage as an investor. Between February 12th and March 23rd 2020, the Dow Jones dropped by 37%. As the United States went into lockdown, over 20 million jobs were lost, thousands of businesses closed, and the virus caused mass panic.
So, how was this a positive from an investment POV?
This was a desperately terrifying time that saw widespread market uncertainty. At one stage, food shelves were empty in supermarkets, and it looked like the world as we know it was on the brink of collapse. However, once the US government stepped in and announced a multi-trillion dollar bailout for businesses and people affected, this money came crashing into the stock market.
By the end of 2020, it was up 10% in total for the previous 12-month period. If you purchased stock at the height of the coronavirus panic, you would have made a serious return from this volatility. The key to any wise investment is to spot the opportunity and don't allow emotion to get in the way of your research.
What's an example of when it goes wrong?
In early 2021, a group of online investors rallied people to purchase stocks in GameStop. It caused a tidal wave of people to buy the stock to punish the corporate traders who had hedged millions betting on GameStop failing.
So, how did this go wrong?
Figures from January to June 2021 show that GameStop's shares were up 1,506% in this period. Providing a phenomenal return for anyone purchasing the shares at below $10 or $20. The share's volatility in this period was staggering. They went from a 52-week low of $3.77 to a 52-week high of $483.
Many first-time traders jumped on the mania and hysteria of the GameStop saga, and plenty bought shares on the way up. Some investors purchased them at $340, $380 or even $450. Due to the nature of the rally and the fact it was driven primarily by people on Reddit, the stock was naturally going to plummet again.
Today it trades between the $20 and $25 mark, showing that volatility can cause a serious financial hit if you get in at the wrong time. Unfortunately, many first-time traders find this out the hard way.
Is it worth the headache?
Over the last 40 years, the S&P 500 Index returned an average of 12.35% per year. This rate has regularly stayed above inflation and provided serious profit. Only three years during this period, the Index returned less than 12%. However, it's important to note that the worst return was 9%. If you widen the lens and look at the possibility of a long-term gain, it can be much easier to accept the ups and downs of stock market trading.