3 Strategies for Managing Stock Market Volatility

Author: James Clark

How to Effectively Manage Stock Market Volatility

The term “stock market volatility” may sound intimidating to new or inexperienced investors. However, understanding volatility can be the difference between failure and success in the stock market. After all, it’s the reason why you have so many stocks available for purchase at incredible prices and also the reason why these prices keep changing.

In this post, we aim to help readers understand stock market volatility and learn to manage it effectively to improve their stock trading skills.

Understanding Stock Market Volatility

Essentially, stock market volatility is a measure of the stock market’s fluctuation or the average movement of a particular stock in terms of overall value over a defined period. If a particular stock is described as volatile, it simply means that its price is moving up and down more than usual. For instance, speculative or cyclical stocks are known for being extremely volatile, with their prices fluctuating dramatically every day. In contrast, defensive stocks, such as consumer staples, are unimpacted by economic conditions, so they’re considerably less volatile and stable.

To better understand what causes stock market volatility, think of them boom-and-bust cycles in the stock market. For example, long periods of increasing share prices tend to drive stock investors to initiate riskier trades which makes them more vulnerable to losses. As far as individual stocks are concerned, their volatility depends on overall performance, credibility, reputation, product announcements, or increase in demand.

How to Effectively Manage Stock Market Volatility

If you’re a new stock trader, the first thing you need to understand is that you cannot eliminate volatility but only reduce it. Here are three great strategies for effectively managing stock market volatility:

1. Diversify Your Stock Portfolio

As a modern stock trader, you must assume that not all investments are rewarding. Hence, you must diversify your stock portfolio to reduce and manage your overall risk. In the end, it’s all about maintaining a positive win-loss ratio. For instance, in a bullish market, you can invest in cyclical stocks, such as restaurants, airlines, hotels, etc., and take advantage of a thriving economy. In times of recession, you can stick to less risky defensive stocks, such as utilities and consumer staples.

2. Invest in Near-Zero Correlation Stocks

Correlation in the stock market refers to two or more investments moving together in similar market conditions. This can be potentially dangerous if you’re investing in stocks belonging to the same sector or asset class. If the overall market for those products or services crashes, so will the prices of your stocks. The closer two stocks are to zero shoes that they’re largely independent of each other and will most likely exhibit different behavior in similar market conditions.

3. Consider Income Stocks

Unlike most stock types, income stocks provide regular dividends to investors. Even though the company offering them can reduce or even eliminate them at any time, these stocks can provide good returns when prices are volatile. However, the performance of these stocks depends on the company, its products and services, and the history of paid dividends.


And there you have it – Our 3 effective strategies for managing stock market volatility. Even though watching price fluctuations can inflict fear upon traders, it’s the only way to invest in companies at great prices. Effectively managing volatility and becoming comfortable with it can help you gain more profit from your investments by capitalizing on fluctuations.

Stock Picks

1. Deere & Company (DE)

2. Lumber Liquidators Holdings, Inc (LL)

3. Donnelley Financial Solutions Inc (DFIN)

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