PostHeaderIcon Understanding Volatility In The Stock Market

Market volatility affects traders and investors in two different ways- it can either cause them to gain some profits or lose out due to the sudden market changes. It is an accepted fact that the stock market is quite a volatile area for investments and trading. It is all a matter of trying to take advantage of it for making gains or preventing potential losses.

Basic Definition

In technical terms volatility refers to the measure of dispersion on the mean or average return of a security or stock. One way volatility is measured is by using the standard deviation, used to tell how a stock price may be tightly grouped around a mean or a moving average. The standard deviation is considered small when the price values of the stock are tightly bunched together. When they are spread apart, there is a relatively large standard deviation.

Volatility And Risk

When it comes to stocks, a higher risk is associated with a high standard deviation. Another way to measure volatility is by taking the average price range of a stock for a certain period from its low price value to a high price value. When there are large price movements that lead to a higher price range, there is said to be a higher volatility. Lower price ranges, on the other hand, result in lower volatility.

Volatility Factors

Volatility in the market can be brought about by certain known factors. There are region and economic factors which can contribute to the performance of the market and affect its volatility. Changes in inflation trends can also have an effect on market volatility. Industry and sector factors which affect the price of stocks associated from within the said industry can also affect the volatility of the overall stock market.

In essence, market volatility enables investors and traders in the stock market to make sound decisions and action. It will help them determine whether a certain period may be a good time to buy, sell or hold on to certain stocks.


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