In share markets, ‘volatility’ is the measure of how far prices move around. Small movements here and there generally mean prices are stable – these periods are considered low volatility. But large price movements over short periods of time are considered to be high volatility.

Shock in the markets

In February, we saw high levels of volatility when US President Trump told the world he was thinking of charging trade tariffs on Chinese imports into the US.

After his announcement, globally, shockwaves rippled through share markets. On 5 February this year, the Dow Jones Industrial Average declined by 1,175 points – its largest-ever single-day points drop. Closer to home, the next day AU$30 billion was wiped off the Australian share market (ASX) and the New Zealand stock exchange (NZX) dropped 2.1 per cent.

The fear gauge

The CBOE Volatility Index, which trades as VIX, is the main index charting volatility and is commonly known as the share market ‘fear gauge’. When the VIX goes up, it means investors are nervous and when it’s low, investors are generally comfortable.

Last year, it hit historical lows, but on Monday, February 5, the value of the VIX more than doubled in a single day – for the first time ever.

Investors often panic when they hear the dreaded words ‘market volatility’. To protect investment portfolios from these spikes, investors should construct portfolios using a diverse range of assets. So, if one asset takes a tumble, it’s not as likely for them all to drop at the same time.

Protect yourself

A well-diversified portfolio may include a mix of shares, bonds, cash, property, and fixed interest. This spread can potentially protect your investment from the dips.

Investing for the long term is another fundamental investment tool for riding the waves of volatility.

However, if your focus is short-term and you actively manage your investment portfolio, buying and selling shares frequently, you can potentially take advantage of these spikes in volatility.

Active traders may potentially profit from short-term movements in the share market — the greater the movement or volatility, the greater the potential for quick gains. Of course, there’s also the real possibility of quick losses. These risks are something active traders need to be aware of.

Trade for as little as NZ$15

ASB Securities has its own Online Share Trading platform to make buying and selling shares easy.

The platform allows investors to trade anywhere online, quickly and cost-effectively.

Once investors have signed up and transferred funds to their cash management account, they can actively manage their share portfolio. You can buy and sell New Zealand shares from $15*. For more information go to www.asb.co.nz/sharetrading

This article was brought to you by ASB Securities Limited.

JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions. This story reflects the views of the contributor only. Content comes from sources that JUNO considers accurate, but we do not guarantee that the content is accurate.

This story provides general information only. The information is not advice and does not have regard to the financial situation or needs of any reader. As individual circumstances differ, you should seek appropriate professional advice.

ASB Securities Limited is an NZX firm. ASB Securities terms and conditions apply. ASB Cash Management Account, ASB Foreign Currency Account, ASB Margin Lending and ASB Term Deposits are provided by ASB Bank Limited.

*New Zealand equity trades up to and including $1,000 by transaction value. Excludes international equity and fixed trades. To be eligible, you must trade online and settle your trades through ASB Cash Management Account or ASB Foreign Currency Account. ASB Securities terms and conditions apply.