According to Fortune, less than a tenth of Generation Z have a retirement account or investment plan for the future. This, coupled with an inflationary business environment and the threat of rising interest rates undoubtedly makes this an uncertain time for novice investors thinking of getting involved in the financial markets.
However, where there is volatility, there is opportunity. That is one of the golden rules of time-honored financial investors. Many of them opt to take a contrarian approach to investing in equities and indices. What do we mean by contrarian? Someone who isn’t afraid to go against the crowd. Someone that can see beyond the “noise” of the media or the markets and take calculated risks on certain assets.
Understanding the VIX Index
One of the world’s most iconic financial investors, Warren Buffett, believes first-time investors should look to get involved in equities when there is a “fear factor” that permeates the markets. The VIX Index is one of the most effective ways to gauge how much fear exists in the markets, measured on anticipated volatility for the S&P 500 index in the next 30 days. The higher the VIX Index, the greater the fear. At present, the VIX Index sits at around 30, which is certainly on the higher end of the measurement.
For context, the index went as high as 79 at the time of the global financial crisis in 2008 and hit 66 around the time of Covid-19’s emergence worldwide. It hovered around the 10-15 mark between 2013-2019, which demonstrates that volatility and uncertainty have ramped up in recent months.
How to invest in the stock market
There are two direct options you can take when investing in the stock market. First and foremost, you can choose to buy shares in specific companies outright. Secondly, you can choose to speculative on the price movement of an equity, without having to own the underlying asset. This is known as using contracts for difference (CFDs) which are offered by many online brokerages today.
If you choose to invest in a CFD stock, you’ll not only have the ability to profit if the asset rises in value. You can also take a short (sell) position and profit if the value of the underlying asset declines. This gives retail investors like you greater flexibility to turn a profit, regardless of whether the stock market is bullish or bearish.
Always be mindful of the risks involved
As with all forms of investing, trading the stock markets involves an element of risk. Be under no illusions, it is possible to lose all the money you invest – especially if you don’t adopt a strict risk management strategy.
If you decide to trade equities using CFDs, it’s a good idea to utilize any trading software supplied by your chosen brokerage. The most state-of-the-art trading software will enable you to set stop-loss and take-profit orders that not only limit your loss per trade but set acceptable profit figures. All of which helps to remove the emotion from trading. With thorough risk management, you can open a trade knowing full well your maximum loss size and your maximum profit size.
Treat the financial markets with humility. They owe you nothing. But with the right approach, it’s still possible to make money from stocks, even when the markets are at their most fragile.
