The Indian share market has been quite volatile for the past couple of weeks. Volatility is the measure of extent of change in the price of a security over time. It signifies the extent of risk or uncertainty associated with owning the security. Volatility can be caused by factors such as the uncertainty of the future (including things like political and economic instability, natural disasters, etc.) and supply and demand. Recently, there has been political and economic instability, such as expectations of an increase in Fed rates and the Russia Ukraine war, causing the market volatility to increase worldwide.

How FIIs and DIIs affect the volatility of the Indian market?

Foreign Institutional Investors (FII) are investors from other countries who invest in the Indian markets. They are pension funds, mutual funds, sovereign wealth funds, investment trusts, etc. On the other hand, Domestic Institutional Investors (DII) are investors from India, such as local pension funds, mutual funds, insurance companies, financial institutions, etc. FIIs and DIIs are the major investors in the stock market. FIIs and DIIs bring a large amount of capital in the markets, thus bringing liquidity. Inflows and outflows from their side can significantly impact the market. If they sell heavily, markets will fall, and if they are buying, markets will rise, causing high volatility in the Indian markets.

How is volatility measured?

If investors want to know the volatility of the Indian market, they can check India VIX. India VIX (India Volatility Index) measures the degree of market volatility (rate and magnitude of price change) that traders expect over the next 30 days in the Nifty 50 index.  If India VIX has a higher value, (like, 20 & above) it indicates higher volatility expectations in the Nifty, i.e., fear and uncertainties in the market. If India VIX has a lower value, (below 15), it depicts a comparatively lower volatility expectations, i.e., less anxiety and more confidence in the market.  A point to note here is that India VIX does not indicate any trend direction. It just shows whether the volatility is high or low.

Are volatile markets safe for investment?

Investors must accept volatility. It cannot be avoided and is a normal part of investing. Some investors believe that volatile markets are a great opportunity to make short-term profits. However, it will require closely watching the open positions and making adjustments promptly. Investors with a long term outlook, like 4 to 5 years can buy stocks with a strong balance sheet, clear earnings visibility, and stable cash flow. Volatile markets can be a risky place to invest your money. However, they can be a profitable investment if you invest in blue chip companies when their stocks are available at discounted price.

To Invest in the Stock Market, you can open a Demat Account with Bajaj Financial Securities Limited.

How can traders/long term investors safeguard from volatility?

There are many types of investors in the stock market. Few do day trading, and others invest for the long term. If long term investors want to protect themselves from volatility, they can opt to diversify their portfolios, which will help minimise the risk/volatility. Day traders buy and sell securities within a single day; and use short term strategies to make profits.

Stop-loss orders can help investors protect their investments from exorbitant losses in a volatile market. A stop-loss order is an order to sell/buy a security when it falls/rises below/above a specific price. This can help them limit their losses if the market takes a downturn/upturn. In volatile markets, traders need to adjust positions more frequently in stocks and options according to the meandering trend. Trading in high frequency means incurring high brokerage costs, which will reduce the profits. Thus, if traders have an account with brokers who charge low brokerage, their costs will be reduced.

With Bajaj Financial Securities Limited (BFSL), traders can benefit from very low brokerage rates. It can go to as low as Rs.5 per order in equity Futures & Options. Investors or traders can also benefit from Margin Trade Financing (MTF), where investors’ buying power will be increased by just paying a small amount of total value in delivery trades.

Overall, investing in volatile markets will depend on the goals and risk tolerance of individuals. If one is risk-averse or is not comfortable with experiencing sudden price swings leading one to red or green territories, it is best to stay away from this market. However, it is essential to do your research and be mindful of the risks involved when investing in volatile markets.

 

 

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