A stock exchange is a place where shares/stocks are bought or sold. Few people wish to sell shares and there are few who wish to buy. They both meet at a specified place. This place is called stock exchange. In short, it is a transaction point for sellers and buyers. An overview of Indian stock market.
Well, suppose buyers outnumber sellers. That is to say, buyers wish to buy 1000 shares, and sellers have only 800 shares. What happens in this situation? Seller jacks up the price. More people (buyers) think they will get better returns on the shares. This is the basic how share market rises.
Well, suppose sellers outnumber buyers. That is to say, buyers wish to buy 1000 shares, and sellers have 1200 shares. What happens in this situation? Buyers down the price. More people (sellers) think they will not get better returns on the shares. This is the basic how share market falls.
If the frequency of sharp fall or rise of the market is high than it is called volatile market. It is measured by standard deviation of the return on an investment. It is a statistical concept. It denotes the range within which deviation can be expected, usually plus-minus 15 percent. There are benefits of intraday trading. Stable investments like bonds have zero standard deviation because returns are fixed.
Volatility in the stock market has existed in the past, they exist in present and they will continue to exist in future. Yet investor has to develop ways to deal with it. Here are following ways an investor can deal.
The best way to deal in the volatile market is to avoid it altogether. That is by staying invested no matter what short time fluctuations are. Easy said than done. It is hard to practice. Because if your investments are taking a beating by a huge amount it can unnerve anyone.
Investors often think that buying and holding the stock for a long time say 20 years or so will make a lot of money for you. Even long-term investments need frequent “peep into” their investments from time to time.
If the company fundamentals are strong and earning consistent. Then no need to worry about these short-term fluctuations. If you feel that company is strong than these periods of volatility can be a great time to buy.
Many people will say that you missed the bull rally by your buy and hold strategy. And your returns will be reduced significantly. But in the bear rally, you can cut your losses significantly too.
Must Read: How Does Stock Market Work?
Delay in execution of order
During volatile prices and high volume, shares are handled in different ways. That is what you see is not what you get.
Because of the high volume of trading, there can be a delay in execution of your order. Let’s say you wished to sell the share when they were at 152.63. You placed an order to buy/sell. By the time your order is executed the actual price can be 153.82 or 151.15, in that case, you do gain or lose by a small margin.
During online trading, chances are that many people will be buying or selling at the same time. This high increases internet traffic and computer system’s processing capacity being low. You may not be able to access your account, or your placed order will take a lot of time for execution.
There are chances that your trade will not be executed at all. You placed the order for buy, along with thousands of investors, and what if no one is selling? Your order does not get executed. And vice versa is also true.
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