What’s the difference between a train and a roller coaster? Stock Market Volatility. To beginners, the ups and downs and round-and-rounds can be thrilling yet frightening at the same time. Now…picture the stock market. In the past few years, the market has traded stable growth (like a train) for more volatile ups and downs (like a roller coaster). It still continues to grow, but falls both longer and faster in between.
Luckily, there are measures you can take to protect yourself from the nauseating feeling of stock market dips.
What do death, taxes and market volatility all have in common?
They’re all totally, completely and unfortunately unavoidable.
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The first thing to do is accept that there’s going to be market volatility. Before even committing to a stock, make sure this is clear as crystal. In these times of constant information flow, people are buying and selling stocks every microsecond. This causes the price to jump up and down in the short-term.
Chances are you’re not playing for the short-term anyway. If this is true, then you need to remember that no matter what the market does, if the company is strong, (strong product and demand) the stock price will eventually head up. Don’t let the short-term turn you against your ultimate goal: the long-term.
Fancy a company that is headed up in your opinion? Trade it here on Wall Street Survivor.
Don’t Lose Your Stock Too Early
A wise trader always puts a stop-loss on his stock. This means that if the price falls by a certain amount, the stock is automatically sold to avoid further loss. That being said…a wise investor puts a stop loss far enough so that their stock doesn’t get sold due to a short-term fluctuation (as opposed to some solid negative news).
So…what price is far enough? Well, it’s a matter of opinion. Some investors look at the average price movement in a day and set their stop price just beyond that. Still, others come up with a magic number that they feel is far enough. Truth be told, the best experience is trial and error.
Try your hand at finding the right stop price by placing a stop sell on a stock that you own.
The Name of the Game is Diversification
Tired of your heart lurching every time your stock dips a little bit? Add more stocks to your portfolio and follow the portfolio return as opposed to a single stock. The name of this game is diversification. By doing this, you will effectively smooth out the yo-yo effect on prices in the short term. The theory is simple. If one stock goes down, the other should go up.
A practical example of this is Exxon Mobile (XOM) and Ford (F). As we know, car sales tend to go down when oil (and by extension, oil company profits) are up. So when Exxon goes up, chances are Ford will go down…and vice-versa. Hence, any movement by one stock will be partially cancelled out by opposite movement in the other stock. When you look at the return from a portfolio perspective, the overall movements won’t be so volatile.
Try to trade stocks from opposite industries by browsing our stocks by industry on Wall Street Survivor.
Guys, if you’re going to make use of the stock market, you’ve just got to be prepared to face stock market volatility. Otherwise, you’re probably better off keeping your money in the bank at a “guaranteed” interest rate (which, by the way, also changes. It’s also volatile to some degree).
So the stock market may be a roller coaster – but think of Wall Street Survivor as your anti-nausea pill :)