Be Thankful For A Volatile Stock Market. It's A Blessing. #Ahsaniftikhar
Many of you will be surprised at this statement or revelation but over the decades after studying markets upon markets, going through data files upon data files, I have come to a final conclusion that anytime the market is unpredictable, it is this exact time when markets SHOULD be volatile. It should be scary. It should give you stress. Why ?
Because if the markets becomes non-volatile in an uncertain situation, people tend to obtain more credit financing or what you call Margin Financing for the purchase of the shares. Volatility discourages people to take risks. And it resultantly discourages people to over extend themselves by borrowing money and take extra risks. This in turn makes the market volatile but bearable and protects itself from a crash. Because if you had borrowed money invested in the markets and if the market became volatile for a few sessions, you would be forced to sell your positions immediately. And at a collective level a huge outstanding financed position of thousands of investors or even millions of investors will create undue selling pressure in the market and result in further downward pressure and finally a crash.
Volatility indices such as the Chicago based VIX only calculate the movements of the markets. Extreme movements and adjust themselves accordingly. They do not calculate the financial reasons behind those movements. This has been my bone of contention with that index for years. It's like monitoring accidents after they happen on a highway but never looking into the reasons why accidents are happening repeatedly and as market regulators and as the protectors of people's assets, authorities need to monitor this phenomenon. Just like market volatility can trigger CIRCUIT BREAKERS to protect investors' interest, there should definitely be a mechanism to prevent People from obtaining financing based on certain triggers. Ahead of time for a short period of time.
There are many more things that we can do to protect our markets. Many more ideas that keep coming up but who is listening. Lol. Why would regulators seek knowledge and suggestions from us.