Markets & Investing
The Reality of Low Market Volatility and High Industry Volatility
01 Sept 2014
Low levels of market volatility have threatened the efforts of various brokers and service providers in the Forex market. And as a direct result of this, corporate restructurings have become the pinnacle industry as many companies search for ways to improve the volatility in the Forex trade market. Trade has been down recently as most investors see no point in investing money in dangerously low volatile conditions.
And because of this, you might see a dramatic turn of events in the daily, quarterly and annual trading moves. However, many traders also owe a lot of this volatility that has in the past made traders millions of dollars in returns. Let’s first try to understand what volatility really is:
Volatility Defined
Volatility in the Forex market refers to a scattering or diffusion of the mean or average return gained on a security. You can measure volatility by incorporating the calculations of standard deviation which indicates how wound up the price of a particular group of stocks is considering its mean or moving average. When stock prices are tightly wound together, the standard deviation will always indicate a small deviation and when the prices are dispersed, the deviation will always be large.
The Affect of Volatility on Market Performance
Being an investor or a trader, you should understand the bond between market volatility and market performance. You see, market volatility tends to reduce as the stock market increases and increase as the market falls. In essence, when this volatility increases, the risk does too and the chances of a good return also reduce. A risk in the market is represented by the widespread returns revolving around the mean. The larger the scattering of returns around the mean, the bigger the plunge of a compound return.
What Affects Volatility?
Some of the major factors that directly affect market volatility are regional and economic factors like interest rates and taxes. These two factors greatly affect the trends in the market and ultimately its volatility. For instance, the central banks of many nations regulate the short-term interest rates for overnight bank lending and borrowing. When central banks influence the rates in such an abrupt fashion, it tends to have a violent effect on the stock market.
Alteration in inflation rates also influences the long-term stock volatility trends. This expands the price to earnings ratio (P/E ratio), making it correlate to economic periods when the inflation rate increases or decreases or when it is stable. This is the time when trade markets begin to experience drastically low levels of volatility.
How You Should Navigate Your Business Clear in Troubled Times
Now comes the big question, how can you save your business and manage it in times of low volatility in the market? The answer, you should try to develop and maintain a cost structure augmented for the present volatility in the market.
Even well-known stock brokers that have emerged from being battered due to low volatility disasters that occurred in 2007 and 2012 now acknowledge and understand the current market’s volatility environment quite well. The number of brokers substantially increased from 2012. However, not all of them seem to have successfully made it through low volatility market environments. But despite the fact that markets are going along sluggishly, there are certain businesses that are showing signs of growth. These growth companies usually have the following factors that contribute towards their growth:
- Less heavy companies that have 40 employees and which do need an excess of directors
- An experienced management team that are involved in every aspect of the business
- The shareholders do not feed on the company’s cash like it’s going out of style
- The employees of the company are loyal, showing their determination and vigour to get the job done. These employees consider 8-hour working days as something obsolete.
- Cost structures of the company are flexible and variable at the same time.
- Cost structures are variable and flexible
The more increased levels of volatility that accompanies bear markets have an unswerving affect on investment portfolios. And this leads to the investors being afraid that their investment portfolios might lose value. This decrease in portfolio value leads to irrational market behaviour because as the portfolios begin to decline, it is more than likely that the investors will attempt to maintain a ‘rebalance’ of stocks. So, what investors do is buy bonds and stock as their prices drop.
