In simple words, the up and down price movement of a stock is what is called volatility.
When you invest your money in a fixed deposit (FD), the price doesn’t fall. It rises every single day until the date of maturity. Your FD-invested money will never decrease in value, it will only rise.
Stock market investment is different. The price will rise one day and the next day it could fall. It could fall by 50% or it could rise by 50%. If you choose the wrong stock to invest in, you could even lose your entire investment.
But it is this volatility that carries both risk as well as opportunities. Experienced traders use market volatility to their advantage and generate good returns from the stock market. Even long-term investors can take advantage of temporary falls to buy their favourite stock at lower prices.
Stock market is volatile because of several reasons. For example, if US President Donald Trump declares a trade war against China, the stock market in India could fall. When Narendra Modi announced demonetisation, the market crashed. The market also reacted negatively when India conducted its surgical strike on Pakistan. This is because the market likes economic stability, which isn’t possible if there is a war between two countries.
Aside from global and domestic factors, a stock could also fall because of company specific news. If a company declares poor or below-expectation quarterly financial results, the stock price of that company could fall.
Most of these factors are beyond the control of investors, hence the risk in stock market investment is always considered to be high in the short term.
So why do people invest their hard-earned money in the stock market where there is risk and volatility?
The answer to the above question will vary from one investor to another. But in a relatively risk-free investment like ‘Fixed Deposit’, the returns are also fixed at 6-7%. But smart and experienced investors can earn upwards of 20% per annum from the stock market. There are traders who earn 30-40-50-60% returns per annum too. Obviously, the higher the risk, the higher the chance of losses too.
Also, the world of stock market is an educational institute in itself. You get to learn a lot here, not only about various industries, but also about life itself. Risks, ups and downs are a part of our lives too and stock market is not very different. The journey is filled with success and failure, profits and losses. It’s all a part of the market and that’s exactly what brings millions of people to the stock market every day.