How to Profit under Market Volatility

If the market is running in volatility, there are always moneymaking opportunities available - and if you use this remarkably simple and effective method, it's much easier and quicker to find them when needed...

Scan the markets.

Whenever the market soars or crumbles, always make a point of checking out the extensive list of stocks you have on your watch-list to see if you can take advantage of the move.

Many times, market volatility actually presents a great opportunity to enter positions at better prices. Keeping a watch-list is a simple, yet remarkably effective thing you can do. It keeps you focused, disciplined, and ready to take action faster than if you start from scratch.

The tools that will help you to be a better investor

Keeping a shortlist of potential companies to choose from still means you need to do your due diligence and revisit your reasons for buying. But if you can have candidates ready, you'll have a good head-start on the crowd. And when the market and individual stories change, you can add and delete from your list.

A Watched List Ensures No Opportunities Are Missed

Regardless of whether you go low-tech or high-tech, a watch-list is an incredibly useful tool. Not only will it help ensure you don't miss an opportunity in a stock that you're keeping close tabs on, it will help you evaluate your own strengths and weaknesses as an investor.

Be sure to review your list and your reasoning at least once a quarter (even the stocks you're no longer interested in). No doubt you'll have a few, "What the heck was I thinking?" moments as you'll have the benefit from a good hand-sight. But it's a good lesson that will only make you a better investor going forward.

I think this can help us to profit when the market is suffering from high volatility

A view on DAX

Germany’s DAX Index started sliding from July 10^th to July 11^th 2007 as the other stock symbols in Germany like Daimler Chrysler; the world’s fifth-biggest carmaker started decreasing from 2% to almost 2.5%, and the Siemens Europe’s biggest engineering company also decreased to round 2.2%. As the stock symbols in Germany were down, the DAX was also affected and declined to 1.2% that day.

On July 12^th as the DAX was down for consecutive two-days, the experts believed that the Dax may fall the following day too. But it didn’t. The DAX advanced as the Hypo Real Estate Holding raised their shares making the DAX to profit by 2%. The share prices were entirely justified by corporate earnings that time in German Stock market, that’s why there was some rise in the DAX index.

But again on July 25^th, the DAX had started to decline. Germany's benchmark DAX Index slumped for the two consecutive days, paced by Allianz SE as the company lost some shares in the quarter. The DAX dropped by 0.9%. The Germany’s DAX market was still in a consolidation, but not in a correction, and it is expected that expectations for corporate earnings have risen significantly since last quarter and smaller disappointments may cause big share price moves.''

That was the position of DAX in the previous month which had started to fluctuate at a very rapid speed. We have to see how DAX performs this month. And already four-days have passed, and the latest information on DAX is, it has moved down a bit in value as the Benchmark indexes in DAX like Allianz AG (ALV GY) Duetshe bank and Germany’s biggest bank and Continental AG Germany’s biggest manufacturing company have seen their share values in a depreciating condition. So the DAX has slipped to 1.3%.

I think the DAX position would be all fluctuating this week too as the Benchmark Index of the DAX is not performing well. Though, lets see how things will work for DAX.

What does an investor do to make money when indexes drop

Sometimes it can be a very difficult task to determine the optimal way to profit from a decline in the overall market. So, what should an investor do to make money when the indexes drop? Or what should one do to protect the gains they've already made without selling their investments and possibly getting a tax bill?

Options, such as puts, are one way. But if you guess wrong, you could lose your money in a relatively short period of time. Shorting stocks is another method. However, that can be riskier than buying options, as the losses can exceed your initial investment.

Reverse market mutual funds might be a solution. They offer professional management and may be safer than investing in options or shorting the market. However, these funds are not for the faint of heart. Long-term investors can get caught off guard and burned by a bullish rally. And expenses can be high.

Two Types
Reverse market funds, also known as bear market funds or short-funds, come in two different investment styles - reverse index and actively managed. Both are meant to make money only when the market goes down.

Reverse index
A reverse index fund is designed to go up when the index it follows drops. So, for example, if the index loses 2%, the fund's Net Assets Value (NAV) should rise 2% before fees and expenses. Some funds use leverage to magnify the impact of your investment by paying a multiple of the index's decline. For instance, if the fund will pay double the index's drop, and the index it follows loses 10%, the fund could earn 20%.

By taking an inverse position that corresponds to twice the daily drop in the index, you can hedge your long positions for half the amount of money. Then you might take the other half of your cash and put it in a money market fund, giving you the ability to increase your hedge down the road.

Reverse index funds follow just about every index out there, including the S&P 500, NASDAQ 100, S&P Madcap 400, DJIA, Dow Jones U.S. Financial Index, Dow Jones Precious Metals Index, Dow U.S. Real Estate Index and Nikkei 225 Stock Average..

And there are even funds that inversely track oil, natural gas and currency indexes. So you can focus as broadly or narrowly as you wish.

High Expenses
Because reverse market funds might frequently trade holdings to take advantage of quick market declines, fees and expenses can be higher than with traditional funds. You could, of course, take the short position yourself and not use a fund with its associated expenses. But keep in mind that a reverse market fund:

• Does not require that you open a margin account to hold short positions
• Will never cost you more than your initial investment
• Can be owned by your retirement account

Conclusion:

Reverse market funds can reduce your exposure to the market without selling the securities you own and taking taxable gains. You may even win big when the markets tumble, or you could earn back prior market losses. However, these funds - especially those that use leverage to magnify potential returns - can lose money quickly in market rallies, and are best used to regulate portfolio risk.