Share Market

Volatility is one of the best phenomenon without which stock markets will lose its charms. The volatility of the stock market is the tendency of the market fluctuation, which is indicated through it’s the indices over a period of time. The higher the indices, the higher are the volatility. In fact, it is the ups and downs of the stock prices which add spice to the market behavior. The ups and downs of the stock market add spice to the market behavior.

The volatility of the market has its own implications as prudent investors can take advantage of buying on dips and sell on highs for profit booking. The disadvantage is that the greater volatility lowers the confidence of the investor in the market which prompt them to transfer their investment in less risky options due to unexpected market behavior.

From the past events, one can realize the root cause of the “unanticipated” volatility in the market through the recent examples such as the time when the govt announced the buying of shares/ bonds of the Indian companies through participatory notes (PN), the hike of the repo rates and CRR by RBI, the fiasco caused by Satyam, the introduction of stringent IPO regulations as well as the fear of US recessions on Jan 21, 2008 saw the biggest ever fall of 1408 points.

The volatility of the stock market has a deep influence in the market which can be seen in the following explanations:

The investment made by the Foreign Investor Institute (FIIs) has a major influence on the movement of the SENSEX which came into limelight during the general elections of 2004.The fear of reforms by the new government has led to a continued selling of pressure, which led to a sharp decline in the index. Later on when the news regarding the reforms stabilized, FIIs started buying back the shares that thy sold earlier, which indicated the aim of profit booking and balancing the portfolio. Had the policies of the Indian govt not been in their favour, they would have withdrawn their investments from Indian markets and invest in some other market which could have resulted in a crash in the index.

Volatility is also a sign of healthy markets as it leads to correction, if there is any over valuation of prices. At the same time there is a huge risk associated with it. The crux of the issue is that one could loose everything due to the volatility of the market, so it is advisable to keep a margin which could bear the volatility risk and not put all the money in the same market as a basic rule of a portfolio management.