Every trading session produces a flood of numbers, charts and commentary. A drop of several hundred points triggers alarm, while a rise of similar size inspires celebration. The BSE Sensex is quoted so often that its daily swings can start to feel like personal events. Investors who also glance at other BSE Indices sometimes find even more confusing signals, with some benchmarks rising while others fall. Learning to read these movements calmly is among the most valuable skills an investor can develop.
Points Versus Percentages
Headlines report changes in points, but what changes in percentages matter. A fall of five hundred points is certainly worrying, but if the index is at a record high, this is a small percentage decrease. As the index grows, the same point movement results in a smaller percentage change
Make sure you always convert to a percentage before panicking. Less than a one per cent change in either direction is perfectly normal for a diversified benchmark, and days with more than two or three per cent moves usually have a reason behind them.
Common Causes of Daily Swings
Short-term movements can be caused by a huge number of factors. Quarterly results of big companies can tilt the index, as can statements on interest rates, taxation or regulations by the government. Monsoon progress, oil prices, inflation, currency movements and more can all contribute to shifts in mood
Additionally, flows in and out of stocks can also impact prices. Institutional investors tend to take positions in a stock at a certain price and sell them later when the price has moved up, or sometimes down, depending on the situation. Futures, options expiry, index related rebalancing and big block deals can also cause jumps or falls in prices.
Most day-to-day swings are noise, and trying to fit a cause to every fluctuation can result in mostly fanciful explanations.
Breadth: Looking Beneath the Surface
The number mentioned in the headlines conceals what is happening beneath. Breadth is defined by the number of stocks that are up as compared to those that are down. A rising index with mostly stocks lower means the market is up due to a few big names, and is weaker than it appears. On the contrary, if most stocks are up when the index is up, it indicates a broad-based move that is likely to be more sustainable
Comparing the large cap index with mid and small caps can give away similar clues. All three are supposed to track the overall market, but one is sometimes in a different league, indicating where the strength in the market is. For instance, if the mid and small caps are weak relative to the large caps, it indicates caution by investors with smaller budgets.
Avoiding the Pitfalls of Emotion
Fear and greed are the biggest villains when it comes to investing. When the market falls sharply, the urge is to sell stocks at a loss, and when the market rises, the inclination is to buy at a peak only to sell at a dip. The biggest aid to avoid such rookie mistakes is to have a written investing plan
This should be created when you are in a composed frame of mind. This should lay out how much you will invest at certain times and at certain prices. It should define your exit points based on various scenarios. It is important to adhere to the plan and not make impulsive calls. Another way to fight the impulse to act on emotions is to cut off constant reminders of market movements. If your long-term goal is to retire in twenty years, a monthly or quarterly check is more important than looking at daily or even weekly changes.
Looking at Trends in the Long-Term
A longer time frame perspective aids in avoiding knee-jerk reactions. The way to look at this is to imagine the market charts on a five-year scale as opposed to a daily or monthly one. The day’s scary decline or surge is barely visible on the five-year chart. Looking at a decade’s worth of information shows that the Indian markets have had several sharpest falls, but the long-term investor has been rewarded for his patience.
Using Information Wisely
It is best to refer to reliable resources such as exchanges, companies and regulators as opposed to social media for information. People who claim to know what the market will do next are usually wrong. In fact, no one knows what will happen the day after tomorrow. Lastly, always remember that every day’s headlines conceal information that is important for weeks, months and years.
Daily market movements are not worth fretting over for the long-term investor. Consistent value stocks, systematic buying and lower costs should be the goal. The best reaction to the headlines is to sit quietly and collect information. The ability to stay calm and collected is the advantage that average investors have when it comes to the markets.