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Finance

What drives stock price volatility and how can I profit?

The Singapore Stock Exchange (SG) has been in a downswing lately and has also seen some volatility. This doesn’t mean there is a lack of profitable opportunities for investors – it simply means that they need to understand how to anticipate and profit from stock volatility.

That entails gaining an understanding of what is driving prices, so that the investor has an insight into why a stock’s price is rising or falling.

Financial results always causes volatility

One of the key drivers of volatility in a company’s stock is when the company reports its financial results. Some companies report quarterly, others half-yearly or annually. Companies often have surprises in the reported figures – both on the upside and the downside.

All stock exchanges and internet forums generate a lot of discussions and speculations, so before the actual results are announced, prices often move sharply, in reaction to the latest rumour about what the results will show.

Surprisingly, the volatility sometimes continues for a few days after the results are out – this is largely due to portfolio managers adjusting holdings, given the numbers that have actually been reported.

And of course, the market often overreacts, so that a swing in one direction or another is followed a few days later by a swing back in the other direction. Observant investors who are following key Singapore Exchange stocks, can develop a feel for when to buy and sell, to take advantage of this volatility.

August 2017 Financial Results

Property companies are definitely doing well, in fact six out of the ten best performing stocks this year, are real estate stocks. After the government relaxed some development restrictions, analyst are forecasting a continuing rise in real estate stock prices. UOL Group, City Developments and others are leading the charge.

In the August results reporting, one of the stocks that saw price swings around the reporting dates was Singapore Airlines which had a moderate 5.6% year-on-year growth in revenue in the passenger business but strong results from the cargo unit. 
However, this was put in the shade by the Hotel Properties limited (HPL) result – the company reported profits up 23%. And after a 77% rise in profits in Q1, Capitaland, Singapore’s largest property developer, followed it up with a doubling of operating profits in Q2. 
Analysts reports are worth reading
It’s well worth reading the analysts’ comments on these companies when they report. There is often background information that can help you understand whether the result is caused by special accounting measures or unusual trading conditions, or whether the company’s performance is likely to be sustained. These two different scenarios are vital for knowing whether the share price is going to be underpinned and steady, or very volatile. Market expectations that a company will constantly outperform are difficult to meet, and disappointment from investors at a missed target can result in the share price dropping.
As a private investor, you can take advantage of these volatility using a spread trading account that allows you to profit from price falls as well as price rise. However, be careful to choose a well run broker, such as CMC markets

Global environment always influences volatility
All stock exchanges are now part of the global information flow, and Singapore is no exception. Investors don’t like international tension, such as the situation between the US and North Korea. They also dislike uncertainty, such as how far US interest rates are likely to rise. All of these factors add to volatility.
Price volatility is always greater before key Federal Reserve announcements or major US economy statistics such as the non-farm payroll data released each month. 

Mergers and Acquisitions (M&A)
M&A activity, even when it’s based on rumours and hotly denied by the parties involved, can send share prices into overdrive. But Singapore has seen a slow start this year in terms of M&A activity. Some property deals have taken place, but nothing like the contested takeovers that really encourage price movements, on the back of the uncertain outcome. 
The investor who carefully observes these market fluctuations can start taking advantage of highly volatile prices to make excellent profits.
*This is a guest post