The coronavirus crisis has left the global stock market with almost unprecedented levels of volatility.
However, this might not necessarily be a bad thing for traders. Volatility is just as likely to cause sharp increases in share prices as sharp drops.
If you’re interested in investment, you may well be wondering whether it is safe to invest your money in stocks at this time.
Read on as we look at the investment implications of our volatile stock market.
What Effects Will the Coronavirus Have on Markets?
The major effect that coronavirus has had so far is the creation of massive uncertainty.
This doesn’t just apply to stocks. Every area of our lives has been cast into doubt by the onset of this crisis.
In such uncertain conditions, it is difficult to know which kinds of investment will do well, and which will fail. This means that market volatility is at a high.
What Is Market Volatility?
Market volatility is a measure of the likelihood of significant price movement. The more volatile a market or stock is, the more likely it is to sharply increase or decrease in value.
Volatility is difficult to accurately measure, as it is impossible to know what future price movements will be. However, it is possible to broadly assess volatility by looking at past behavior and current market conditions.
Market volatility is currently at record highs.
Because of the economic problems caused by the recent coronavirus, many investors are selling stocks, which has caused huge price drops. However, these lower prices may entice other investors to buy up the stock in the hope of a market recovery.
Why a Volatile Stock Market Is Not Always Bad News
If you’re a risk-taker, the coronavirus crisis might end up being the best thing to ever happen to your investment career.
Many stocks might end up temporarily trading at a huge discount. If you identify these and buy them at the right time, you will make huge gains when their price recovers.
Consider Your Needs & Aims
Investors should always have a clear idea of their appetite for risk.
If your goal is to make a huge profit in a relatively short space of time, and you can afford to lose all of your investment, you’ll want to look at high-risk stocks.
However, if your goal is to slowly build up money (for retirement, say), the excessive risk is not your friend.
Remember that stocks are not the only kind of securities you can invest in. If you want a safer bet, there are many valuable assets that can be invested in that carry less risk than company shares.
Government bonds are traditionally thought of as being among the safest securities to invest in. Their rate of return will be low (typically not much higher than a deposit account). However, the safety of your money is all but guaranteed.
The Kinds of Stocks to Buy
So, what stock investments are likely to turn a profit in spite of (or maybe even because of) the coronavirus?
Technology has improved most aspects of our lives. It seems only natural that it will have a role to play in battling the coronavirus.
Companies providing healthcare devices will likely experience a surge. Providers of office software may also do well because of the increased numbers of people working from home.
The continuing fundamental importance of technology is an important consideration. The coronavirus will eventually be neutralized as a threat. When that happens, technology will still be a huge part of our world.
Therefore, an underpriced tech stock might be a smart investment.
Once viable treatments for coronavirus begin to emerge, the pharmaceutical companies that make them will profit hugely.
However, there is more to it than that. An event like the coronavirus is sure to make the general public more conscious of their health on a general level.
Products that promote health and hygiene generally are therefore likely to become far more popular.
A disclaimer; this one is something of a wildcard.
The coronavirus crisis has decimated the travel industry in the short term. Borders are closed and flights are almost empty of passengers if they haven’t been grounded. Many travel companies will go bankrupt.
However, those that don’t may find themselves in a very strong position in a few months. Once normal travel resumes, there will be less competition in the market, and many people emerging from isolation will be very keen to go on a belated summer vacation.
Should I Diversify?
The choices you make will always be dictated by your investment goals, as explained above. However, unless you’re just investing as a pure gamble, diversification should have some role to play.
Diversification is the process of spreading your investment monies out over different stock types or different asset classes entirely. For anyone investing with a view to providing long-term income going forward, diversification is essential.
Diversification is important because the sectors of the economy typically don’t all nosedive at once. As one industry suffers, another flourishes.
This does mean that you are limiting your upside potential. However, you are also protected from severe losses.
During these difficult times, diversification is more important than ever. Try to include stocks of companies that are less likely to suffer critical losses because of the coronavirus. For more conservative portfolios, it might be an idea to invest a greater proportion of your money in bonds.
Will You Take Your Chances in a Volatile Stock Market?
As you can see, a volatile stock market is not necessarily a bad thing. If you play your cards right, it could make you rich.
However, it also presents huge dangers. If you want to take a chance on stock investment in the current climate, make sure you only invest money you can afford to lose.
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