How to deal with Stock Market Ups and Downs?

The Indian stock markets move up one day and crash by more than 300 points on the other day. They have become very volatile and many investors who have invested either directly or through mutual funds – seem to have made huge notional losses.

In this situation, should you buy more of stocks and mutual fund units? Should you go for lumpsum investment or discipline yourself by investing small amounts every month? What is the best strategy in such times to deal with the stock market ups and downs?

Stock markets is continuously volatile due global crisis. In fact volatility is definitely going to be a part of the stock market scenario. We all are aware about the present global economy condition. It will take time to correct the present economy condition in order to bounce back totally. However, since India is not directly linked to the financial turmoil with regard to the western markets, I am of the opinion that we are going to be the first ones to recover from it. As an investor, you should be very careful when trading in small stocks, as they often display sharp price movements. Investors should not ignore the fact that high volatility is common among smaller stocks. If you ignore the above point of view, then you are likely to end up looking huge losses for yourself.

You are likely to come across a set of listed companies who have small equity base along with their shares being traded thinly in the market. Such scripts tend to show sharp increase in prices, ready to tempt investors to participate and expect high returns. However, in such a scenario, investors sell shares at a higher level and it comes to a point where the volume dries up along with the fall in price. The end result in such a situation is that investors are left with losses and no way to move out.

Investors should also keep a check towards any type of manipulation that is likely to take place in a stock. You might come across an unusual activity, in terms of price or volume, especially at a time when the company does not justify such a change. In such a situation investors should remain outside the action area and should refrain from utilizing their hard earned money in this particular stock.

Generally, investors decide to trade in equities without deciding upon the type of trade. They sometimes end up selling their profit making stocks, in a smaller way due to anxiety. On the other hand they might not prefer to sell even when the fundamentals have changed drastically. Both the above mentioned scenario can result into missed profit opportunities and losses. Hence, if you properly classify and plan every trade, you will then be able to avoid emotions and thus be able to reduce risk accordingly.

There are also other set of investors who will decide upon the type of trade, but he will later change the type of trade. For example: If a stop – loss is hit, he starts converting a day trade into positional and positional into investments. A positional based trading is a trading which takes place based on the technical factors. When you take a position based on technical, you should make use of stop – loss levels. Positional calls should never be converted into long – term investment on the basis of a stop – loss.

One should compare long – term investment with marriage. You just cannot enter into a divorce. Medium term investing can be compared to an affair and intra – day trading is a risky affair which can be considered as a one night stand. Hence, end before any investor enters into a trade has to be able to classify the type of trade he is opting and also should be able to plan for that trade in a strategic manner.

What next?

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