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Is Now a Good Time
to Buy Stocks?

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Is Now a Good
Time to Invest?

Investing periodically can be an effective way to achieve your financial goals. However, this means having the skills to be able to invest in all types of market conditions. The stock market, like any other financial market, has its own share of ups and downs and periods of volatility. The Coronavirus crash and COVID-19-induced volatility is a case in point. The huge volatility caused by lockdown and an uncertain economic future sent the stock markets across the world on a roller coaster ride and share prices plummeted. Let’s take a look at how you could invest during market uncertainty.

The Right Time to
“Buy Low, Sell High”

For starters, stock prices are expected to remain considerably low for some time, due to the coronavirus-led economic slowdown. Investors can consider buying stocks of those companies that appear bullish in the current environment. This is particularly applicable to those who have suffered losses due to the coronavirus pandemic-induced stock market volatility.

The market has been trading at levels that make company valuations attractive from a long-term investment horizon. Certain sectors like tech stocks (especially tools that support online business and communications), pharmaceutical products, food and beverages, hygiene brands and e-retail can be considered.

Some experts suggest to start investing now, rather than waiting for the market to bottom. Picking the bottom would be difficult, with chances that you miss out on the buying opportunity to buy low and bring the average cost of investing down.

Stock Market
Volatility Means
Trading Opportunities

Secondly, the stock market volatility could provide numerous trading opportunities, even for long-term investors. Between February 20, 2020 and March 18, 2020, all major stock market indices suffered major losses due to the swift spread of the pandemic. In March 2020 alone, major markets in the G20 nations saw a downturn of at least 25% to 30%. Between March 6, 2020, and March 8, 2020, the S&P 500 lost 15%, the Nasdaq 100 lost 12.4%, while the FTSE 100 declined 21.4% and the DAX 30 fell 26.4%.

But, the markets have surged periodically since then. For instance, on May 18, 2020, the S&P 500 gained 90 points, its highest gain since March 6, 2020. On June 5, 2020, the Dow surged to record highs, rising 800 points, riding high on improving US employment figures, recorded in May 2020.

Markets Always
Revive

Historically, every market downturn has been followed by a surge. There have been good and bad years. Even if it is worrying to witness the plummeting stock values, it is important to remember that these prices are likely to surge again in the future.

The S&P 500 index, for example, which lists the biggest tech stocks in the US including titans such as Amazon and Apple, has been giving an average 10% return since 2010. Those who stopped investments in the 2008 recession missed out on the longest bull run in the stock market in history. Between March 9, 2009, and November 2019, the S&P 500 made a 468% gain, a record long gain since World War II.

So, while volatility definitely exists in the market, if you have an investment goal that goes beyond 10 years, such as saving for retirement and or children’s education, the stock market could be a good place to park your money.

Indices CFDs can Help Minimise Risks

Trading indices through derivative products like Contracts for Difference (CFDs) allow you to speculate on the price direction of the underlying index, rather than have physical ownership of shares. You can enter into positions in both bull and bear market conditions, which means that you get many more trading opportunities.

How Often
Should I Invest?

Investing regularly is the only way that dollar cost averaging can work for you.

If you invest on a monthly basis, or if you invest at regular intervals, even when the market is down, you are in a better position to neutralise the effects of sharp volatility. The reason for this is that when stock prices fluctuate, the price you pay at each periodic investment will vary. This is what is called as “dollar-cost averaging.” It helps you avoid a situation where you make a poorly timed hefty investment, only to suffer huge losses later on.

What are the Best
Indices to Trade?

Stock market indices are made up of numerous leading shares of a particular economy or sector. They are tools for investors to track the market or a sector, and compare return on specific investments. Thousands of stocks are traded on stock exchanges worldwide, which make these indices reliable and efficient ways to track overall market sentiment. Trading them can be considered less volatile than other financial instruments, as no single stock cannot lead to extreme price fluctuations in the index.

However, not all indices share the same level of liquidity. It is important to understand how their prices are calculated. There are market-value weighted indices and price-weighted indices. Cost of trading differs between them.

Here are some of the most traded indices in the global markets that you can choose from:

S&P 500 or US 500

The US 500, also known as the S&P 500, is a US stock market-based index that lists 500 largest companies, by market capitalisation, listed on the New York Stock Exchange (NYSE) and the Nasdaq. It is considered as one of the best representations of the US market, holding more large cap stocks than any other US index. Constituents on the index are more diverse than other big indices too. As of March 13, 2020, the index consists of 24% IT sector stocks, 14% health care stocks, 12.2% financials, 11% from the communications sector and almost 10% consumer staples and discretionary.

It is considered less volatile than the Nasdaq 100, but can be more volatile than the Dow Jones. The S&P 500 can be considered good for those who are cautious of slow moving markets, and yet not too adventurous to get into high volatility conditions.

FTSE 100 or the UK 100

The UK100, commonly known as the FTSE 100, represents the top 100 companies listed on the London Stock Exchange (LSE) in the UK. The index is a market-cap weighted index, representing approximately 80% of the UK market value on the LSE. The FTSE 100 is considered a gold standard for UK indices. Given the country’s leading role as a prominent economic and financial centre in the world, the UK100 could provide a lot of interesting trading opportunities.

The index includes a huge number of financial services and banking companies, energy companies along with construction, household goods and media companies. The UK is a substantial oil and gas producer in Europe, second only to Norway. Many large companies in this sector are included in the index, which means that crude oil price fluctuations impact the performance of the index.

Most FTSE 100 companies have worldwide presence. More than the British Pound (GBP), it is fluctuations in the US Dollar (USD) and Euro (EUR) that impact the bottom line of these companies.

AUS200 or S&P/ASX 200

The AUS200 accounted for 82% of Australia’s share market, as of March 2017. This market-cap weighted index consists of 200 of the largest companies trading on the Australian Stock Exchange (ASX). A huge portion of the index is occupied by the financial sector, followed by energy, materials, consumer staples and consumer discretionary products.

Studies have revealed that, historically, the Australian stock market has provided better returns than other global stock markets. Since 1900, the ASX has generated higher returns of more than 6.5% annually. The AUS200 is a great way to invest in this market.

Dow Jones Industrial
Average or US 30

The US30 index or the Dow Jones Industrial Average (DJIA) represents 30 blue-chip industrial and financial US companies, traded on the NYSE on Wall Street and the Nasdaq. The Dow is a price-weighted index and not a market-cap weighted one. The index is calculated by the sum of the price of one stock for each of the 30 companies, which is multiplied by a factor known as “corrector.” The 30 largest companies belong to sectors like financials, energy, IT, pharmaceuticals, retail and entertainment. The Dow is frequently used by financial media as a barometer of the US stock market and the broader economy.

DAX 30 or GER30

Another European blue-chip stock market index is the GER30, also known as DAX 30. The index consists of 30 largest German companies, trading on the Frankfurt Stock Exchange. This is also a market-cap weighted index, consisting of multinational companies that are highly significant to the global economy and the German domestic market. Over 75% of the sales of DAX-listed companies are earned from overseas, which makes it an important indicator of the global economy. Prominent sectors included in the index are automobile, banking and financial services, mining, communications, electronics and consumer goods.

JP225 or Nikkei 225 Index

For investors interested in the Asian stock markets, the JP225 or Nikkei 225 index provides good opportunities. This price-weighted index is Japan’s top index, consisting of 225 blue-chip stocks listed on the Tokyo Stock Exchange. Major sectors on the index include food, automotive, electric machinery, textile, retail and financial services. While investing in Japanese index derivatives like CFDs, investors are exposed to exchange rate fluctuations between the Japanese Yen (JPY) and the US Dollar.

The Yen is considered a safe-haven asset, and rises when the US Dollar declines. A stronger Yen could weaken corporate profits in Japan, which is why you will usually see the JP225 declining after the US sees economic downturns.

You can speculate on price fluctuations on all these indices and more from a single platform, when you trade them through CFDs with a trusted broker. Trade in global CFD indices futures at margins starting at just 1%.

Which Indices are Considered Most Volatile?

Volatility in indices depends on their constitution. Some sectors are more volatile than others, exhibiting huge price swings in reaction to a significant market movement. Indices following stocks in emerging economies are also more volatile than those of more advanced nations, like the US, EU and UK. Political disturbances, economic instability and natural disasters plague emerging economies.

Volatility in stock indices can be a good thing for investors, if they invest wisely, use proper risk management measures and distribute their investments uniformly across different financial assets.

Here are some volatile indices to consider:

Nasdaq 100 or US100

Of all the US stock market indices, the Nasdaq 100 or the US100 shows the greatest volatility. This is due to the presence of many US technology giants on the index, which are considered high-growth and riskier stocks. It is considered a technology index in the global markets. On account of this, the Nasdaq 100 can offer many trading opportunities, regardless of the market direction.

DAX 30 or GER30

The GER30 index is also known for its volatility, making it attractive for traders with higher risk tolerance. With only 30 company stocks in the index, it can be more volatile than other indices, like the S&P 500 and FTSE 100. This volatility surges during market downturns.

The volatility index of DAX (VDAX) rose to 82.13 in October 2008, during the financial crisis. Sudden and dramatic moves in the index can lead to losses, such as the Flash stock market Crash of May 2010. It is important to keep track of European economic data and political announcements when trading this index.

CAC40 or FRA40

FRA40 tracks the 40 largest companies by market capitalisation on the Euronext Paris, which is France’s largest stock exchange. It has a tendency to be volatile, due to a huge concentration of high-risk stocks, like automobiles, energy, luxury and cosmetics items, banks and airlines. Fluctuating crude oil prices can hit the prices of big companies like Total, which is one of the biggest French companies listed on the index.

CAC40 is also highly sensitive to Euro fluctuations, being the index with the most number of multinational companies in Europe.

Euro Stoxx 50 or EURO50

The EUR50 consists of 50 stocks from 12 Eurozone nations, all blue-chip quality companies and leaders of their sectors. The index includes companies only from those nations that have adopted the Euro as their currency. This is why Euro price volatility impacts the index a great deal. Volatility in the index also surges during unfavourable economic data releases or political conditions in the Eurozone. The Euro STOXX 50 volatility index surged to new highs during the 2020 pandemic-induced crisis.

What are Considered
the Most Volatile
Sectors?

When you invest in the stock market, on a long-term basis, you can capitalise on the positive end to volatility over time. Volatile stocks go through some periodic losses, but they are also likely to surge later. This represents a good opportunity to buy low and then wait for eventual growth in value.

Some sectors that exhibit more volatility than others include:

Energy

Industries in this sector include oil and gas, coal and renewables, like solar power, wind energy and hydro-electric power. Supply and demand fluctuate in the oil and gas market, which impacts the demand for renewables as well. Slower economic growth tends to lead to lower demand for energy sources.

Since 2018, the US-China trade war has led to concerns regarding slowing global growth. The COVID-19 situation in 2020 has further escalated this downward trajectory, leading to a full-blown oil price war. Political developments, such as the attack on Saudi oil facilities, tensions between US and Iran and the strife amongst OPEC nations, influence the price of crude oil.

Greater demand for renewables has been seen for several years, due to rising concerns about climate change. Together, these forces create intense volatility in the energy sector.

Healthcare

Rapid aging of populations and excessive demand for new medical technologies and drug treatments causes volatility in this sector. These demands remain the same, even during economic slowdowns, which can make these stocks outperform others in declining market conditions.

At the same time, the sector is also highly impacted by regulatory changes, particularly during election periods, resulting in low company earnings. So, biotech stocks are considered highly volatile, as R&D innovations make the solutions sound very promising, yet regulatory measures and extensive clinical trials can increase their time to market.

In the 2020 pandemic era, the Nasdaq Biotech Index outperformed both the S&P 500 and the medical sector, with a 4.9% surge YTD, as of April 30, 2020. The virus spread boosted the value of certain stocks, on hopes of a potential vaccine against the Coronavirus and could send certain stocks to all-time highs in the event of a key discovery.

Technology

A wide range of goods and services comprise this sector, making it one of the largest sectors in terms of market capitalisation. On the business side, it could be hardware, software, cloud-computing tech, logistics technology, semiconductors and big data. From the consumer side, it includes mobile phones, television sets, personal computers, social networks and more.

These stocks tend to be more volatile than others, as they are often valued, based on their potential performance in the future. Technological trends change at a rapid pace. If investors think that a certain technology has a lot of scope, its prices will increase, or else decrease.

Financial

This sector comprises banks, insurance and mortgage companies, financial planners, stock and commodities exchanges, financial services and brokerage firms. The sector saw tremendous volatility during the 2008 recession. Standard deviation for the sector remained at the third highest, at 16.8%, in the 2010s.

The financial sector is hugely impacted by changes in monetary and fiscal policies, issued by central banks and governments. Changes in regulatory compliance laws also make these stocks volatile.

Consumer Discretionary

Consumer discretionary products include retail, media, luxury goods, automobiles, auto parts, hospitality sector and consumer services. Unlike consumer staples, like food, medicines and clothes, these products or services are not essential for people.

The sector is most sensitive to economic cycles and shows a tendency to undergo contraction during recession periods, followed by a gradual surge in early-recovery to mid-recovery periods.

What is Portfolio
Diversification?

To prevent your returns from volatility risks, consider spreading your investments across various assets, so that exposure to any one type of asset class is compensated for by exposure to other markets. This means you need to invest in asset classes that react differently to a particular economic event. General market risk affects nearly every stock, so consider investing in other asset classes like currencies, commodities, precious metals and cryptocurrencies.

For new traders, it is useful to first register for a demo account, where they can familiarise themselves with various markets and the features of the trading platform, before investing their hard-earned money.

What Sectors to
Consider to Reduce
Volatility Risk?

As market sectors experience volatility at different periods, it’s a good idea to build a well-diversified portfolio that comprises a range of sectors. Defensive stocks can prove to be a good way to limit losses in long-term investment strategies. These are some of the best stocks that tend to perform better in times of market downturns or broader market recessions. They can provide constant dividends and stable earnings, regardless of the state of the overall stock market.

Some examples of defensive stocks include:

  • Consumer Staples: There are essential goods that people will buy, irrespective of market conditions, such as food, beverages, certain household items, hygiene products and tobacco. Their earnings and cash flows have been predictable in major economic crises.

  • Utilities: This sector, comprising of production and delivery services of water, electricity, natural gas and other such requirements, are less sensitive to changes in an economy. Companies in this sector tend to be less volatile and provide high dividend yields.

However, note that while defensive stocks have low volatility, they might generate lower returns in market peaks.

Another sector to be considered is real estate, which has low correlations with major asset classes. These stocks can act as a potential hedge against inflation, since there is a tendency for rent and real estate values to increase with rise in inflation.

Who Should Not
Invest When the
Market is Down?

Ideally, investors with a long-term investment horizon can consider investing at any time. This means a 10-year timeframe. However, you should consider not investing when market is down if:

  • You have a shorter investment horizon: If your cash is earmarked for any other important purpose, say within the short-term 6 months or a year, consider not investing in a volatile climate. If you have to pay-back a high interest rate debt or a credit card debt, investing when the market is down might not be the best time.

  • Lack of job security: If your current job is unstable and you don’t have an established emergency fund, investing can lead to erosion of your savings.

  • Low risk appetite: If you are highly risk-averse, investing in a declining market might prove stressful for you.

CFD trading in equities and indices can provide the assurance that losses won’t surpass the initial margin deposits. With the ability to go long and short on the price movements of global companies, you can trade both rising and falling market conditions. You also get to have cash pay-outs when a stock pays dividend.

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Source - database | Page ID - 945

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