Volatility is the level of variation in the price of a stock over a given period of time. It is often measured using statistical methods such as the standard deviation or average true range, and is usually represented as a percentage or index value. A stock with high volatility experiences bigger price changes over a given period of time compared to a stock with low volatility.
For investors, volatility can be an important factor to consider when evaluating a stock. High volatility can indicate that a stock is more risky, as the price can fluctuate wildly, making it more difficult to predict future price movements. This can be a concern for investors with a low risk tolerance, or for those who are looking to hold onto a stock for a long period of time. On the other hand, stocks with low volatility may be less risky, but they may also offer lower returns.
Investors should also note that volatility can be affected by various factors such as company-specific news and announcements, changes in market sentiment, economic data releases, and political developments. For example, if a company releases poor earnings, its stock price will likely fall, making it more volatile. Similarly, if there is a change in interest rates or a major political event, it can cause fluctuations in stock prices, making the market more volatile.
Volatility can also be affected by the overall market conditions, and the level of volatility in the stock market as a whole, for example the FTSE index or the FTSE 100, during times of high market volatility it can be difficult for any stock to resist the trend of the overall market.
Investors should also be aware of the volatility index (VIX), which is an index that measures the level of volatility in the US stock market, with the level of VIX being high it could indicate high market volatility and investors can use it as an indicator of market sentiment, and it could also affect the returns of their UK based stocks, as investors can use it as an indication of how much risk they are taking by investing in the stock market.
Overall, volatility is an important factor for investors to consider when evaluating a stock. High volatility can be a red flag for those with a low risk tolerance, but it can also present opportunities for those who are able to handle the risk and have a strong understanding of the underlying factors that are driving the volatility.
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