What is Volatility?

Published by Thomas Herold in Economics, Investments, Trading

'Volatility' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Volatility in investments has to do with the possibility of stocks or other investments undergoing a dramatic gain or loss in price and value in a certain amount of time. Investors consider the volatility of stocks and other investments when they decide to buy more shares of the asset, sell their current holdings, or to buy shares of a new offering. Whatever an investment’s volatility proves to be, investors’ goal should always be to make the highest return that they possibly can for the lowest chances of experiencing losses.

With stocks, a great concern is how stable the assets of a company are that underlie the stock itself. A sudden loss of confidence in a public company would also likely cause a sharp decline in the price. The stock price drop and accompanying volatility is actually created by the public’s perception of something within the company, like changing leadership or a coming acquisition.

In fact the stock might come back in a relatively short time frame as the public decides that the company is stable after all. But such factors might be more troubling and enduring, causing the volatility of the stock to become too high. When such volatility persists, many investors will decide not to buy additional shares or even to sell off the ones that they hold.

The overall conditions of a market can also influence investment volatility. As the stock market all around shows higher signs of volatility, individual investments will likely suffer the same fate. This occurs as consumers become worried about the whole economy, or if political situations force investors to take more conservative trading positions. Should such impacts grow sufficiently significant, then even stable stocks can become lightly traded while investors sit on the sidelines to watch for the troubling issues to get resolved. In the meanwhile, the stocks and their underlying options might make dramatic rises and drops in price from higher volatility.

Volatility is a fact of life that investors have to be capable of handling. Still, some stocks and investments demonstrate higher degrees of volatility than do others. Investors can gain an insight into this amount of individual volatility that an investment might have thorough looking into its historical levels of price and accompanying volatility.

Using this data with projected trends in the economy and markets, investors can get a good picture of the amount of an individual investment’s volatility to determine if they are comfortable with it before they invest in the offering.

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The term 'Volatility' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.