It is fair to say that although recent years have seen a series of unpredictable social and political events triggering market volatility, the dramatic price swings we have experienced since the start of 2020 have been unlike anything seen before in our generation. The outbreak of COVID-19, the enforced national lockdowns followed by the global economic downturn, as well as the US election, all had a major impact on the markets, while the online trading landscape has become more digital and more densely populated.

Increased levels of volatility spurred by these events have certainly presented investors with opportunities to make a handsome profit. And meanwhile, it is now much easier for people to step into the world of trading owing to the rise of fintech companies offering innovative and intuitive mobile and desktop trading platforms, which has opened online trading to the masses.

In 2020, with the Bank of England cutting interest rates and savers’ returns to an all-time low, and lockdown providing people with extra time to educate themselves and try something new, the time has never been riper for people to take advantage of these platforms and immerse themselves in the world of online trading. The numbers back up the narrative: in September 2020, CNBC reported that online trading activity “increased dramatically” in the first quarter of 2020 compared with 2019 as people sought to make big financial gains from the volatile market movements.

Markets in overdrive in 2020

Last year, we saw several examples of stocks that experienced big price rises after starting from a low base – great news to investors that came on board when stock prices were much lower. The best examples of such stocks – which may not be a huge surprise with the gift of hindsight, but are, of course, much harder to predict in advance – came from those businesses that provided offices with the means to continue operating and individuals the chance to stay fit and connected with family and friends throughout the various lockdown periods.

For example, the video-conferencing company Zoom shot from relative obscurity to become the go-to communications tool for many to stay connected last year. With the need for video calls undiminished in 2021, Zoom’s stock now sells for between US$370 and US$390 a share, a staggering price hike from March 2019 when the company first filed to go public at just US$36 per share.

Zoom was far from the only company to experience a major price rise in 2020. DocuSign, a technology company that enables organisations and individuals to sign documents electronically – a capability that became essential for many industries in the lockdown and working-from-home era – is another example. Riding the wave of customer demand, DocuSign saw its prices rise by approximately 200%. Meanwhile, Peloton, the popular exercise equipment company, also saw its prices rise by around 350% as gyms remained closed and people sought other means to stay fit.

Investors can also trade on stocks that are falling in value and stand to make an equal profit. This is known as ‘short selling’, and it is essentially when traders borrow a stock that they bet will drop in price, sell the stock and then later buy the stock back to return it to the lender. Should the stock price drop as anticipated, the short seller buys it back at a lower price and the difference between the sell price and the buy price is the trader’s profit. Traders can also express the same market view without the complex processes via contracts for differences (CFDs), simply opening a short position with a dealer, which enables them to profit from downward price movements. 

There are many examples of companies and industries that saw significant price drops last year due to the pandemic in which investors would have executed the short selling strategy, including a number of airlines, hotels, and cruise operators, as well as the hospitality and leisure sector in general.

Protecting assets in unpredictable markets

While the increased market volatility certainly offers more opportunities for profit, there is also an equal possibility of making a loss. The sharp rise in online trading by newcomers, combined with last year’s wildly unpredictable market movements, saw plenty succumb to financial losses. Investing is an art, and as well as learning to keep their fingers on the pulse, traders need to understand and acknowledge their risk appetite. In saying that, there is the option to leverage risk management tools with certain brokerages for those willing to trade in riskier climates.

Although not widely available across the retail market just yet, increasingly powerful risk management tools are slowly making their way onto the scene to give traders a cushion should the market move in a different direction than they anticipated. There are a range of different risk management tools out there, and some even go as far as to offer total protection against loss for a defined period, which is a great option for those new to the game or who would prefer extra support.  

Outlook for 2021

Last year may go down as the most volatile year in our recent history, but the start of 2021 has not shown any signs of the markets settling just yet. In just a few short weeks, the economy has already contended with price swings owing to the end of the Brexit transition period, the ban on the sale of crypto derivatives to retail consumers, as well as an army of retail traders going after the most shorted stocks on Wall Street to drive up prices – such as GameStop, AMC, Blackberry, and silver – driven predominantly by a community of Reddit users.

The global markets are also still vulnerable to the ongoing impact of the pandemic. Although there is positive news with mass vaccinations programmes under way across the world, there is some concern about new variants of the virus that is slowing our progress to a return to market stability.

There are still many uncertainties ahead in 2021 – from when the pandemic will be over to what Brexit will truly mean for the UK – but what is clear is that there remains an abundance of opportunities to make great gains for those eager to invest. As markets remain volatile and interest rates remain low, we can expect to see more people try their hand at online trading, particularly as platforms continue to innovate and social media sites continue to capture a broader audience to the world of trading. This opens the door to an exciting world of opportunities, but one that must be approached with care. The message for traders is this: embrace the opportunities, but understand the risks and take steps to stay safe.