Even if you have never ‘played’ the stock markets before, the above chart is pretty easy to understand. It reads like a roller coaster ride that is climbing until it reaches its zenith, before plunging, and then rising again and plunging again, etc. Stock market price appreciations are displayed by white blocks and shock drops are indicated by red blocks. The above chart represents the performance of the Dow Jones Industrial Average since September 2017. Significant appreciation has taken place, even with the dramatic February 2018 market correction.

The Dow Jones Industrial Average may now offering traders and investors value-driven opportunities. Simply put, this means that you may be able to pick up some bargain deals now that readjustments have taken place. By Monday, 5 March 2018, the Dow was trading at 24,917.17, with a year-to-date return of just 0.80%, and a 1-year return of 21.63%. A cursory glance at the above chart clearly reflects that the current level of the Dow Jones is less than the 50-day moving average of 25,278.37. But all of this says precious little about investing in the Dow.

How Market Fundamentals Impact Investment Portfolios

One would have to examine the underlying fundamentals of the US economy to determine whether the drop was significant enough to warrant value-driven investments, or whether additional drops will be taking place. Based on performance criteria such as unemployment figures, nonfarm payroll data, the tax overhaul stimulus, the new Fed chair, stable monetary policy, and ongoing calls for interest rate tightening at the Fed, it looks like the economy is on the mend. The annual performance data we are seeing with Dow Jones stocks does not sound any alarm bells. Given that the 52-week trading range of the Dow Jones is 20,379.55 on the low end and 26,616.71 on the high-end, we’re still trading in bullish territory.

If we shift our attention to the S&P 500 index and the NASDAQ Composite Index, things are equally bullish. The S&P is up 14.26% over 1 year, and the NASDAQ Composite Index is up 24.87% over 1 year. Granted, the short-term performance has been lackluster – and the 50-day moving average for the S&P 500 index is now above the current level of the index. The only major US bourse that reflects tremendous bullishness, and a level that remains above the 50-day moving average is the NASDAQ composite index. It is currently trading around 6,880, while the 50-day moving average is around 6710. Clearly the anti-gravity nature of this index is being fuelled by the spectacular performance of tech stocks.

How can you protect yourself against stock market volatility if you don’t know a whole lot about investing?

Knowledge is power; that much we all know. However, it takes gumption to play the markets. Strategic insights are necessary to forecast price movements of underlying financial instruments. Whether you are dabbling in indices, stocks, Forex, commodities or cryptocurrency – you need to be able to gauge how these categories are being affected by macroeconomic variables. According to financial gurus at Olsson Capital, there is much to be learned from thinking outside of the box. One of the most popular methods for protecting against stock market volatility is a derivatives trading product known as a CFD.

A CFD has nothing to do with a CD – a certificate of deposit. A CFD is a contract where the price of an asset is listed relative to the future price the trader believes that asset will sell for. These buy/sell options track the price movements of the underlying financial instrument. In other words, when you buy a gold CFD, you are not purchasing any gold stock or ETF – you’re simply buying a derivatives trading product that tracks the price movements in gold. This begs the question: How can CFDs help to protect and grow your financial portfolio? There is a unique investment strategy used by traders, known as hedging. When you hedge, you take out a position on a financial instrument that may be contrary to the nature of your other investments.

Gold is a classic example of a hedge. When you purchase stocks, and markets are highly volatile there are several safeguards that you can invest in to protect the value of your portfolio. These include gold funds, gold stocks, gold coin, or gold ETFs. If you allocate money towards gold during a bull market, you are hedging your bets in the event the market fails your gold stock will rise. When done correctly, hedging has significant benefits. CFDs can be traded for profits up or down. The only thing that matters with these derivative trading instruments is that you have called it correctly. If you are bearish on the price of gold, you could take a put option on a CFD – go short – and profit accordingly if the gold price drops. This helps to alleviate the losses you may rack up if your gold stocks take a hit!

Author's Bio: 

Author, Freelance writer