Stock markets are no longer considered to be a market for the elite or a select few investors and traders. In recent years, there has been a tremendous increase in the number of retail investors that have taken a plunge in the stock market and have also made it their primary source of income. Therefore, having a thorough knowledge of the stock markets is crucial for every participant of the market. It is a fact that the stock market is influenced by any internal and external factor or news. The ability to react to it is what distinguishes between a good and a bad portfolio.
Let us discuss the impact that any news can have on the stock markets and the
What are the stock markets?
Stock markets are present all across the world where retail and institutional investors and traders can buy and sell shares, commodities, and other assets. There are two recognized stock markets in India NSE (National Stock Exchange) and Bombay Stock Exchange (BSE) having both primary as well as secondary markets. In the primary markets, companies list their shares on the stock exchange where they are traded based on the demand-supply functions. The secondary market, on the other hand, is where the prices of the commodities and assets are based on the stock price of the assets and securities in the primary market.
How do stock prices move based on any news?
Stock markets are driven by the principle of how investors and traders react to any news. Their reaction is what impacts the demand and supply functions and ultimately the price movements. The market reaction to any news can be broadly defined to be positive or negative. Some examples of positive news can be a good quarterly report of a company, a piece of favourable news for a particular sector or industry.
On the other hand, some examples of bad news can be when the company posts bad financial results, or if the political scenario of the country is unfavorable. The news of the covid 19 pandemic took the stock markets across the world by storm and crashed them overnight. The extreme measures and relief packages announced by various governments were viewed as positive news and helped in reviving the stock markets.
These examples show that the way stock prices move is based on the perception and the interpretation of the majority of participants of the market.
How to reduce the impact of stock market news on individual portfolios?
The impact of any news on the individual portfolio can have a pronounced impact depending on the extent of the investor or trader’s reaction. However, there can be a few measures that can reduce the impact of any news on individual portfolios. Some of such measures are
a. Stay calm and react rationally without being emotional
The key to navigating the volatility in stock markets is by having a calm and focused mind. Keeping track of the news 24×7 can be overwhelming and disorienting and can lead to adverse reactions. The media has the tendency to sensationalize the news, especially bad news. Hence, it is important to not listen to everything bounced around by the media and ignore the noise. This will help the investors react rationally to any news and make the best of even an adverse situation.
b. Diversify the portfolio
An important feature of every sound portfolio is its diversification. A diversified portfolio is a quality tip given by every professional trader or investor. It will help the investors and traders balance their risks and also enjoy better returns from different sectors and industries.
c. Do not lose focus on the long term goals
Most often when the stock markets crash or when there are at their peak, many investors and traders tend to focus on short-term gains and liquidate their quality securities. While it is important to gain an advantage of the stock market movements, it is also important that investors do not lose focus on their long-term goals. The portfolio of an investor is also curated based on their long-term goals like setting a fund for their retirement, setting a fund for the education of children, etc. Liquidating such assets just for short-term gains can prove to be an unhealthy decision and may ultimately not fulfill the long-term goals.
d. Take advantage of the stock market news
We have discussed that it is important to not react rashly to adverse news. However, at the same time, it is also important to not ignore the market news completely or be oblivious. Investors and traders should monitor the stock movements and place their bets correctly to gain the maximum advantage of any favorable and unfavorable news. This can also be the right time to have an overhaul of the portfolio and weed out underperforming assets for quality ones.
The impact of any news on the stock markets is often quantifiable in absolute terms while it can also have an underlying effect on individual securities. The ideal way to judge any news and its impact on the stock markets is to analyze it thoroughly and realize its micro as well as macro impact. It is also important to know that not every piece of news has a substantial impact on the stock market. Hence, the ability to distinguish between quality news and noise is what differentiates between a good and a better investor or trader.
Yes, The key to having a profitable portfolio is the ability to know when to enter and exit the market. Hence, it is essential to keep track of daily stock price movements and the markets in general.
When the markets begin to crash, the immediate reaction of novice investors is to sell or liquidate their holdings and exit at any available price.
The best time to add quality stocks to a portfolio is when the stock markets are down and the stock prices of major strokes are hitting lower than their average price.
The interpretation of news is what defines its impact and therefore, a piece of news that can be bad for some can also be considered to be good for others. A classic example of this phrase is the impact of Covid 19 when the stock prices of the travel and tourism sector crashed while the insurance and medical sector soared.