What is Volatility?

May 1, 2018 | BEGINNER, INVESTING 101

We’ve all heard the adage, “the bigger the risk, the bigger the reward.”

Volatility is all about risk and reward.

Volatility refers to the fluctuations in the price of a security over time. Market volatility refers to the fluctuations in the overall market that occur over time.

The stock market is inherently volatile, and while this does increase the risk of investing, it also creates the possibility of huge returns.

Volatility is what makes stocks so attractive and what allows for them to provide higher returns than other types of investments.

A volatile stock experiences extreme fluctuations in price. Unlike blue-chip stocks which either grow very slowly or stay consistently priced over long periods of time, more volatile stocks provide opportunities to buy low and sell high.

That means you could stand to make a lot more money on a volatile stock, but you also risk losing what you’ve invested as there is no guarantee that the stock will go up.

Stocks with lower volatility have lower risks associated with them – and lower rewards.

For this reason, seasoned investors favor volatility.

Long-term investors, who prefer to buy-and-hold, hope the fluctuations that occur will balance out over time, and any losses will be mitigated by big gains.

Short-term investors often try to buy when prices are down and sell when they’re up to capitalize on the wildly fluctuating prices highly volatile stocks bring.

Regardless of what type of investor you are, volatility is crucial to making money in the market. Without it, stock prices would stagnate and no one would win.