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Handling market volatility

business Updated: Nov 18, 2007 21:06 IST
Arnav Pandya

With the markets setting new peaks in recent months, volatility in share prices is attracting a lot of attention from the investors. This factor is often used to find the kind of positions prevailing in the market. Many investors fail to distinguish between the different kinds of volatility, which acts as an impediment for them to arrive at a right decision on their investment strategies.

Intra-day volatility

This is the kind of volatility where the movement in share price takes place during the trading day and where the end result can be unpredictable. This movement gains importance because it is difficult to predict the manner in which this entire situation works out.

This not only leaves the investor perplexed about the day but on its future direction as well. This is the time when the investors who are swayed by greed and fear will make their worst decisions and lose their shirts. Such a situation could prove dangerous for day-traders also. There were huge swings that took the benchmark BSE Sensex beyond 800 points of intra-day volatility in the recent past.

Closing volatility

There can also be closing volatility whereby the investor will witness that the closing price for the shares are at a huge difference to the previous close. This will result in a situation where the price can go up sharply for a few days and then fall for a certain period of time. This position can also be witnessed where there might not be an overall trend present, but still daily changes are sharp. The main thing here is that the close of prices between two consecutive days is quite high. The investor has to watch out for the larger movement that occurs when such volatility is seen while making a decision.

Impact

Understanding the nature of the volatility is critical for the individual investor to arrive at their final decision. For those who trade during the day the intra-day volatility can lead to a huge loss because of the sudden change in the position that takes place. They end up keeping the shares they bought for exiting the same day many a times.

On the other hand the long-term investor need not bother about the intra-day volatility because they are not involved in dealing with the short-term changes. However, a single direction movement on either side can play an important role for these investors because either a sharp rise or a sharp fall might lead to a situation where a buy or sell decision might have to be taken promptly.

The writer is a certified financial planner