How might I profit from stock market volatility?

It’s been years in the stock market – and there’s no end in sight. The combination of a sluggish economy, high inflation and huge US banks last week means we could see more stock market volatility in the coming weeks.

As an investor that can look scary, especially if the value of the portfolio falls too much. But that volatility is part of being a long-term investor. In fact, I can give you a few opportunities that could give you a gift.

See why

When stock prices fall during periods of stock market volatility, there are often one (or both) of two reasons.

The first reason is that stock prices fall because business is expected to get worse, meaning they are worth less than before. An example of this in my opinion is the 35% decline in population Fevertree drink This stock price is shown in the table every year.

Inflation threatens to take a toll on profits as cash-strapped consumers cut back on luxury fizzy drinks. The combination of lower demand and higher costs could hurt Fevertree’s top and bottom lines. Investors have flagged the stock, though for now at least revenue growth remains strong.

But another reason stock prices fall during periods of market volatility is a general investor panic.

For example, at the beginning of the pandemic, National Grid Shares fell 18% in the months between February and March 2020.

But are the business prospects of energy distribution monopolies significantly affected by the outlook of the pandemic? I don’t think so. If I had bought at that point in March 2020, my stock would now be worth 21% more than what I paid for it. The dividend yield is 4.9% – but if I buy then at a lower share price, my yield will be higher.

Purchase value on sale

The first situation can cause investors to consider it a trap. Stocks may seem cheap compared to historical prices. But changes in the underlying business outlook could mean the company’s earnings are set to be lower, justifying a lighter valuation. What looks like a bargain can be the opposite.

But the second scenario strikes me as a rich place to fish for real. Cheap isn’t just about price – it’s also about value. If I can buy shares in quality companies for less than they are worth, buying shares for the long term can help me profit from the volatility of the stock market.

Get ready

The challenge is that volatility can be short-lived.

Waiting for the next stock market correction or crash before deciding what deals I can buy may mean the price has recovered before I decide!

However, I think the time to act is now.

By making a shopping list of big companies, I want to have a portfolio that if I can buy stocks cheap enough, I will be ready to go around the stock market again.