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Volatility in the markets holds potential for short-term investors

Monday, 06 February 2012 | 00:00
The stock markets are volatile these days, and there are sharp intra-day movements due to developments on the domestic as well as global economic fronts.
For example, the economic data from the US, developments in the European markets, macroeconomic data from the domestic markets etc have had an impact. Such developments are the main causes of the volatility in the markets.
These significant developments and the consequent volatility in the markets are expected to continue , going forward, due to the uncertainty around the world.
These sharp market movements offer opportunities for short-term investors. Such investors can make money while the markets are in an upward direction, as well as when they are moving downwards.
These are some investment basics for short-term investors:
Access to markets
It is important for short-term investors to have uninterrupted access to a market terminal. It could be an online portal or stock broker with easy access. With a shorter investment cycle, timing the entry and exit into stocks is very import for a short-term investor.
Market information
Short-term investors should be very attentive to market developments. There have been many instances in the recent past where a development during the day has had a severe impact on the markets. There are sharp market reactions to negative developments due to the negative sentiments prevailing in some markets.
Booking profits
Short-term investors should follow the market movements closely and maintain a tight 'stop-loss' and 'book profit' trigger for their open positions. They should also keep revisiting these triggers based on the market movements.
Since the markets are quite volatile, overnight open positions, especially F&O positions, could be very dangerous .
Short-term investors should look at increasing their chances of exiting in profit. However, it is better to exit and cut losses on a bad position, and be prepared for the next opportunity , rather than get stuck.
Analysts say if a short-term investor exits seven out of 10 times in profit on an average, he should be happy with his performance.
Brokerage charges
Brokerage costs on short-term investments can reduce or eliminate profits of small investors. Investors with a small corpus should not trade on a short-term basis in the markets.
Due to the smaller lots, they can end up paying a high brokerage charge, and that may eat up their profits on profitable trades. On the other hand, it aggravates losses in case of a loss exit. Not for small investors.
Short-term investing is a different ball game as compared to longterm investing. It is like trading in stocks. It requires a different mindset. Small investors are advised to stay away from short-term investing , especially if it involves smallcap or lesser known mid-cap stocks.
Small investors should consider the opportunity cost (the earning opportunities they lose while spending time in the markets) against the profits they can make by riding on short-term market opportunities.
It is advisable for small investors to stay away from fancy short-term investments and focus on building a good portfolio with a long-term perspective.
Source: Economic Times India
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