Stock Market Volatility is the most feared and respected word amongst the investors. Analysts recognize its capacity to outsmart the best of the conclusions. Volatility is like the charming lady that holds the breath of the investors and enthralls the market. The unpredictable ups and downs add spice to the market working. Volatility does well to the investors; it works badly to some as well. At times it is like the horse on the gallop, which the rider is unable to control by the jeans and guide to the proper direction. When the tantrums of the market become too much to bear and too difficult to understand, the investors move away from the market to seek greener pastures in some other areas like gold and real estates and the conservative ones to the traditional bank deposits and government bonds.
The causes of stock market volatility
The causes of volatility of the market are simple–The unanticipated information influencing and having telling effect on the price of the stocks. For the market to stabilize uncertainty has to ebb out. Normal conditions need to arrive again. Volatility is like the ocean in storm. It takes time for it to blow away, before one enjoys seeing the normal waves. Some of the factors that can create volatility in the market are:
- CRR and interest rates hike/reduction by the Reserve Bank of India
- Fiasco and bankruptcy by some of the business houses and financial institutions.
- IPO regulations made stricter.
- Government announcement relating to purchase of shares and bonds of Indian companies through PN (Participatory notes).
- Economy of any Nation relates to global conditions. For example, US recession has hit several countries in varying degrees, depending upon their volume of their trade (exports/imports) with US.
- Rate of dividends. But this alone is not the prime cause. .
- Volatility in economic variables, such as industrial production, inflation, and debt levels in the corporate sector.
- Industry-specific and company-specific factors.
- Declaration of the updated information relating to a particular stock and the reaction of the traders/investors.
- Fear and other psychological issues. Disregard for rational valuation of the stocks and greed takes over.
- Demand and supply. When a stockholder wishes to liquidate a big holding, it affects the sentiments of the market.
- Ambiguity about the future of a particular of a company in the normal course or due to raids by the enforcement agencies of the government.
- Major political, economic and military policy events.
- Major non-economic events. Victory/defeat of an important political leader in the elections.
- Influence of media on the investors.
These things, among others, contribute to tremors and aftershocks in the commercial world and affect the market operations.
Volatility in its purest form is neither good nor bad. It is fair. The healthy markets must have this trait as it leads to correction if there is overvaluation of prices of shares. To an extent it warns and protects the interests of the investors. It is just like the gentle God-sent rain from the heavens. When volatility is high, it is the time to buy. But the reverse is not true. When it is low, none should proceed with the action to sell the shares in a hurry; that will be misreading of the market conditions.
Historically, the stock market has invariably soared after critical political/economic events that affect the global business operations. Volatility soars only to normalize slowly. From the investor’s point of view, the timings of entry are important to book profits or incur losses. The art of handling the volatility is more important than the phenomenon of volatility. Some analysts argue that the degree of stock market volatility can be a reliable tool to forecast the direction of economy’s growth. It helps to predict the GDP growth.