How to Trade In a Volatile Market

Equity markets are always subject to volatility and investors can leverage tools and focus on diversification to benefit.

The stock markets continue to remain volatile in 2021, following a stellar bull run in 2020. The rise in equity investments and federal support let the markets run wild in the past year, creating a visible disconnect between the stock market and the real economy.

However, following the mass vaccination drive and multiple fiscal stimulus packages, global economies are headed towards a V-shaped recovery. Investors are gauging the effect of trillion-dollar stimulus packages and continued dovish monetary policies.

However, the rising benchmark yields have triggered a global equity sell-off in February, which caused major indexes across the world to decline temporarily.

While markets worldwide have shrugged off the impact of rising rates, President Biden’s proposed $2 trillion infrastructure plan could trigger a sell-off again.

Rising concerns regarding inflation and a potential rise in corporate tax rates or lower Federal bond repurchases are some of the systemic risks in the equity markets.

Here are a few ways how investors can hedge volatility 

1. Follow Recent News

The stock markets are highly dynamic and are often influenced by minuscule socio-economic, geopolitical, or domestic market news. To illustrate, the rising tensions between China and the United States have culminated in a strained trade relationship between the two economies, causing the booming electric vehicle market to witness a trend reversal.

You need to be updated with market-moving news as it allows investors to identify the ideal entry and exit points in the markets, thereby maximizing overall return on investments. For example, investors can capitalize on the recent slump in major EV stocks by assuming a long position in their preferred stocks. Given the growth potential of the EV market, these investments should reap significant profits in the near term.

You can follow the latest market news on the following platforms. 

  • Yahoo Finance

As one of the most popular sites in the investing world, Yahoo Finance offers a comprehensive insight into a public-traded stock. Ranging from price charts to periodic financial results and earnings estimates, this free platform is a one-stop destination for retail investors. Moreover, Yahoo Finance chronologically publishes the latest press releases of a company, along with related articles published by financial journals.

  • Plus500

Plus500 is one of the budding trading platforms in the market, making head waves through its insightful investment reports and market news section, and industry competitive charges. As one of the top-rated CFD trading apps in the market, you can invest in multiple market instruments such as equities, commodities, forex, cryptocurrencies, etc.

  • Motley Fool

As a renowned website publishing articles based on recent market news, Motley Fool specializes in the US, UK, and Canadian stock markets. Written by industry experts, these articles provide an insight regarding a company’s past performance and future earnings growth, considering the global market movements.

2. Diversify Your Investment Portfolio

Spreading out investments towards multiple market instruments lowers the volatility risk significantly.

Many investors often allocate a portion of their portfolio towards safe-haven assets such as gold and silver, as their prices have an inverse relationship with equity markets.

While the overall return on investment might be lower for precious metals, the risk associated is significantly lower as well.

This is because safe-haven assets tend to grow significantly during times of economic downturn, and gradually during periods of market boom. 

Investors can also allocate a part of their income into the bond markets during times of recession, as federal governments and central banks generally launch an extensive bond purchase program amid liquidity crunch in the markets.

Partial exposure to the cryptocurrency markets can help investors capitalize on the current market trend while satisfying an investor’s risk tolerance. 

3. Invest in Value Stocks

Value stocks have historically outperformed growth stocks over the long run. As billionaire investor Warren Buffet’s key investment strategy, value stocks with solid fundamentals are guaranteed to deliver robust profits in the long run.

These stocks, often cheaper than the industry peers, help investors grow their portfolios gradually over a long period, irrespective of any short-term fluctuations.

Value stocks often help investors drown out “investment noise”, which can lead to significant losses, if not vetted carefully. 

4. Derivatives Trading

Derivatives such as futures, options, and swaps are popular among hedgers and arbitrageurs. These tools, if used properly, can help investors gain significant profits despite the market trends.

Moreover, the prices of derivative tools often reflect the future market sentiment of a stock or industry.

For example, if one-year oil future contracts are priced higher than the spot oil prices, it implies that oil prices will likely rise in the future.

However, a contractual price lower than the current price might indicate a future downturn, making it best avoided, or ideal for shorting investment strategy. 

Conclusion

The stock markets will always be volatile in the near-term, given their high responsiveness to market events. Thus, knowing to hedge your investments against market fluctuations is key to generating robust profits.

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