Understanding the stock market can be likened to discovering a gold mine, but it can also yield nerve-wracking losses when you are not in the loop with market dynamics. As a small business owner, navigating the stock market can be a daunting task, especially when faced with the unpredictable nature of market fluctuations.
According to a survey conducted by the National Federation of Independent Business (NFIB), 11% of small business owners reported an increase in stocks, while 16% reported reductions. Additionally, 31% of small business owners reported a moderate impact from supply chain disruptions, while 35% reported a mild impact, as shown in nfib.com and nfib-sbet.org.
These statistics highlight the importance of small business owners understanding how to navigate stock market fluctuations to protect their investments and business operations. Here’s how to navigate stock market fluctuations as a small business owner.
Hedging Against Market Volatility
Hedging against market volatility can help protect your business from potential losses, Jay Pestrichelli, CEO of ZEGA Financial, revealed on thestreet.com. Pestrichelli believes that hedging strategies can help reduce the impact of market volatility on client portfolios, while also providing much-needed downside protection. One way to hedge against market volatility is to use futures contracts, such as S&P 500 futures, to lock in prices or freeze the price unit, making it unalterable or being repriced, so as to protect against probable losses. S&P 500 futures are financial futures that allow investors to hedge with or speculate on the future value of various components of the S&P 500 Index market index. The bundle of stocks in the S&P 500 is composed of stocks of 500 large U.S. companies, it also tracks the stock prices of these companies.
Mckinsey’s 2022 stock market analysis reveals that stocks invariably move upwards in long-term investments and have constantly returned an average of 6.5% to 7.0% per year since about 1800. This shows that a long-term investing approach is another effective strategy for navigating stock market fluctuations. While short-term market fluctuations can be unsettling, the stock market has historically trended upward over the long term.
Instead of trying to predict the market with the expectation of selling stocks at a higher price in the short term, to make quick profits, focus on long-term investment goals. This approach can help you weather short-term fluctuations and take advantage of compounding returns as shown by investopedia.com which reveals that between 1975 to 2022 (47 years) the S&P 500 had only 11 losses annually. This research shows that you can grow massive wealth when you invest on a long-term basis.
In addition, you can consistently invest a portion of your business profits into your investment portfolio. A study published in the Harvard Business School found that 499 major U.S. companies listed from 2003 to 2012, used 54% of their profits which totaled $2.4 trillion to purchase their stocks back. Thus, by investing on a long-term basis, small business owners can avert short-term stock market fluctuation and benefit from the long-term massive growth of the market.
Small business owners can use volatility measures to navigate stock market fluctuations. The CBOE Volatility Index (VIX) is a popular metric used for measuring the anticipated volatility of the stock market. It produces a 30-day forecast of volatility, and it is commonly used to assess market sentiment, especially the level of apprehension among market participants. So by monitoring the VIX, small business owners can get a sense of how much the market is expected to fluctuate in the near term.
Navigating stock market fluctuations can be challenging for small business owners, but hedging, diversifying your portfolio, and taking a long-term investment approach can help ensure the long-term success of your business.
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