Stock Market Volatility – Six Ways to Handle Stock Market Volatility
A famous saying by Warren Buffett is, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
While you participate in the stock market, one thing that you cannot escape from is market swing. The stock market is one investment avenue where the fluctuation in the prices of securities can be sudden and big. Stock market volatility makes investing in the stock even more interesting and tricky. Volatility is basically changed in the Nifty or Sensex or stock prices going up or down. The extent of volatility is what matters most to the people in the stock market. Higher the movement in the stock, greater is the volatility. Therefore, it becomes very important for traders and investors to handle volatility carefully. In this article, you will learn six ways to handle stock market volatility.
Six Ways To Handle Share Market Volatility
- Stick To Your Financial Plan
You must ensure that stock market volatility does not affect your financial plans. Market volatility is for short term and your financial plans are for long term. Therefore, you must know how to manage different types of market conditions. You must always remember that volatility shall not last forever and you must stop worrying about the daily moves in the market. Stock markets are known for creating a huge wealth in the long term i.e. 10 to 15 years and short term volatility or daily volatility of stock should not make you change your financial plans.
- Invest on a Consistent Basis
When there is stock market volatility in index and stock prices are consistently going down, it is the best time to invest. Investing on a consistent basis in the share market is the key to success in the long term. Sitting on the side-lines and waiting for the market to fall further to make a purchase at a lower price is not the right thing to do in a volatile market. This is because when markets are volatile, it is impossible to predict the next move. By continuously purchasing in all the types of markets, you can get shares of good companies at a very cheap rate. Historically, it has been seen that investment made when the markets are volatile and at lower levels has given astonishing returns to the shareholders in the long term.
- Focus on Quality
It has been seen that during stock market volatility, quality stocks perform much better. Good stocks are less volatile because they have good brand name. Their robust business model and continuous demand for their products help them perform better even in the bear markets. Therefore, you must focus on investing in stocks of good companies. You must also remember that overexposing your portfolio to high beta mid and small caps in volatile market can go against you. Therefore, it is always advisable to take exposure in good and quality stocks when there is share market volatility.
- Doing Nothing
It may sound strange but doing nothing when there is stock market volatility in index is one of the best strategies. This is because investors often make bad decisions at such times. They begin to churn off their portfolio and end up making huge losses. No one can time the market correctly, so doing nothing when the market turns against you is the right thing to do.
- Phased Approach
When the markets are volatile, you never know the right level to purchase the stocks. This is because the stock price can further go down after you make a purchase. Therefore, in such stock market volatility, the phased approach is the best approach to follow. In this approach, you can keep purchasing the stocks at different lower levels in a phased manner. The rupee cost average (RCA) will help you in lowering the average price of investment and give you the best purchase price for the long term. The phased approach is also useful in averaging the price of stocks that were purchased by you at a higher price when the market was not volatile. Therefore, the phased approach will help in enhancing your returns and handling the daily volatility of stocks is a better manner.
- Diversify
A well-diversified portfolio is always the safest way to tackle stock market volatility. Make a portfolio that is a mix of stocks, short term investments, bonds, etc. The selection of the asset class must be based on your long term financial goals, current financial situation, time period and risk-taking ability. A diversified portfolio will always have the potential to give you good returns even in an unstable market. In fact, it is advisable to always make a diversified portfolio in the long run, to safeguard your capital and earn higher returns.
Other Ways To Handle Stock Market Volatility
It has been seen that gold is a better performer when the markets are volatile. Gold prices tend to go up when there is global uncertainty, war or financial crisis. Gold prices also shoot up when the equity market turns volatile. During such times you can allocate 5% to 10% of your portfolio to gold. Gold will handle the market volatility well and enhance the value of your portfolio.
The Bottom Line
The above mentioned are six ways to handle stock market volatility. An investor in the stock market must know that volatility is a part and parcel of the markets. It is your ability to manage the risks that will determine how much return you will make in the stock market. Following a goal-based approach is one of the best strategies in the market. However, if you are new to the market or want any help during share market volatility, you can contact IndiaNivesh Ltd. We have a deep understanding of the financial market and we offer expert services with a personalised approach to create value for you.
Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."
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ROE vs ROCE – Know the difference between ROE & ROCE
The two financial ratios, Return of Equity (ROE) and Return on Capital Employed (ROCE) are the important measures to calculate the company's operational efficiency. They are used together to determine the future performance of a company. ROE shows what a company earns for the stakeholders and equity contributors. To put it in simple words, ROE considers the net return on equity. On the other hand, many analysts use ROCE over ROE. This is because ROCE considers return to all the stakeholders and not specifically to the equity contributors. Therefore, using both of them together can help in determining whether a company’s stock is worth investing or not. Let us first learn how ROE and ROCE are calculated. Return on Equity Formula Return on Equity is calculated using the following formula; ROE = Net Income ÷ Shareholders’ Equity In the above formula net income includes the income that the company has earned over the year minus all the expenses and costs. The income includes payouts made to the preferred stockholders but does not include the dividends to the common shareholders. Higher ROE is considered beneficial for the company as it suggests that the company is using the funds efficiently towards the growth of the business and generating higher profits. Return on Capital Employed Formula Return on capital employed formula is as follows; ROCE = Capital Employed ÷ EBIT ROCE measures how efficiently a company uses the capital to generate additional profits. ROCE is very helpful when used for comparing companies within the same sector. Let us now learn about the key difference between ROCE and ROE. Difference Between ROCE And ROE The ROE only calculates the net return on the equity of a company i.e. the return on the residual equity capital. On the other hand, ROCE calculates the return to all the stakeholders of a company that includes both debt and equity. ROCE majorly focuses on the long term debt program of a company that has a residual value of more than 1 year. ROE considers the impact of leverage to determine what would be left for the shareholders of the company after servicing the debt. Return on equity assumes interest as a cost to the company. While on the other hand, ROCE has a different approach. It considers interest as returns. It focuses on the operational performance of the company and evaluates the measures to service the company’s debt and equity. The main focus of ROE is the equity shareholders of the company and this often leads to over glorification of the return on assets of the company. Return on capital employed measures the efficiency at which the assets of the company are used. Therefore, it is a better indicator of capital utilization because here the capital is sum of equity and debt, which is equal to the total of the long term assets of the company on a balance sheet. Higher ROCE is always better than higher ROE. This is because the equity shareholders have direct benefits when the ROCE increases. A company with high ROCE will be able to raise debt at better terms as compared to the competitors which will lead to cost of capital and cost of equity of the company going down. The above mentioned are a few differences between ROCE and ROE. Let us now learn when to use ROE and when to use ROCE. When to use ROE and When to use ROCE? Return on equity measures how a company manages its funds internally. Like for example a company that has ROE of 85% will be considered to be performing really well. Here the most sensible thing a company can do is to retain its holding rather than paying dividends to the shareholders. This is because the company is making very efficient use of the capital available to it. Such companies are also on the radar of big investors because companies with higher ROE have the potential to generate a huge surplus and deliver good performance in the future. Return on capital employed has EBIT as the numerator which means that the operating profits arrive after the adjustment of depreciation. So this means that ROCE factors in all the fixed asset investment of the business but not the cost of finance. Unlike ROE, ROCE considers the debt holders and lenders to the company. Therefore, the ROCE calculates the extent up to which the operating profits are covering the long term capital of the company. Using ROE and ROCE Together While making an analysis of a company, it is always good to use ROCE and ROE together. By doing so you get better insights into the company. When a company has ROCE higher than its ROE, it suggests that the company is making good use of its debt to reduce its cost of capital. Another way to interpret it would be that the company’s debt holders are getting higher rewards than its equity holders. The great investor Warren Buffet adds to the debate on ROE vs. ROCE. He says that companies should have both ROCE and ROE above the levels of 20%. According to him, both of them should be closer to each other and the large gap between the two is not good for any company. Both ROE and ROCE are important to measure the performance of the company. The investors should always seek investment in companies that have stable ROCE and ROE numbers. If you are a beginner in the stock market and want to invest after learning ROE vs. ROCE, you can contact IndiaNivesh Ltd. Our team of experts deploys technological tools to find right companies for investment and create value for you.Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."
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Stop Loss – What is Stop Loss & How to Use it in Share Market
The stock market is one investment avenue that can change your fortunes. The sky is the limit when it comes to making returns in the share market. While it gives you immense opportunity to earn profit, there are equally good chances of making losses and eroding capital if wrong trading decisions are made or if the market does not move as per your expectations. Often people lure with the idea of intraday trading as it has huge potential to make solid returns in just one day. However, things can go the other way than expected and you can end up making losses too. In such situations, by putting a stop loss in share market you can protect your capital. This article will help you in understanding the concept of stop loss and why it is important. Let us begin by learning what is stop loss? What Is Stop Loss? Stop loss can be said to be a specific price level at which an automatic order to buy or sell shares/securities is executed. Stop loss protects you from excessive losses and saves your capital for future trading by reversing or closing your positions with minimum losses. It also saves you from constant monitoring of the stock or securities price. Let’s take an example to understand how the stop loss works. Suppose you have purchased 100 shares of Reliance Industries for intraday trade at Rs. 1400 with a stop loss of Rs. 1385. This stop loss will close your trading position or sell the 100 shares when that specific price is triggered. The stop loss here saves you from the loss that could have occurred had you held the position and the price went down drastically. So if during the trading session, the price of Reliance Industries goes below or touches Rs. 1385, your stop loss would be trigged. Thus, in a sense, the stop loss safeguards your capital and always keeps you in the game to take a new trade. Stop loss can be put manually when you place an online order or you can instruct your broker to put a stop loss if you purchase stocks on telephonic communication. Let us now learn the benefits of putting a stop loss in the market. Benefits of Stop Loss in Market Stop loss trading can protect you from excessive losses. Stop loss makes you a better and disciplined trader. It helps you in managing your account more efficiently. By putting a stop loss in share market, you are no longer required to track each and every position. If the stop loss is hit, the position will square off automatically. Stop loss are easy to put. Stop loss trading helps you in knowing your risk appetite. As a trader, you get to learn about the amount of risk you can take without impacting your financial status. After learning the benefits of stop loss in share market, let us now learn how you can set up a stop loss order. How to Set Up A Stop Loss Order? Setting a stop loss order is very easy. When you place an online order to purchase or sell stocks, you will get the option to add a stop loss. You need to fill the exact amount where you want to place the stop loss. You can also place a bracket order. A bracket order is designed in such a way that a buy order will have two opposite orders, the first order is the price at which you would like to book profit on the higher side and other order is the price or stop loss where you would like to close your trade when the stock price goes down. Bracket orders for sell positions are just opposite to the buy order. One thing is clear that by putting stop loss in place the traders specially the smaller ones can protect their capital by limiting their losses. By carefully placing the stop loss, you can become a disciplined trader and take better trades. Stop loss minimises the risks and maximises your profits. If you are new to the world of the stock market or want to learn to trade using the stop loss, you can open a demat account with IndiaNivesh Ltd. We are one of the most trusted and professional financial services group in India.Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."
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