Stocks Q & A- What Does Volatility Mean When

What Does Volatility Mean When Referring to Stocks?

When referring to stocks, volatility measures the probability that a stock's price will experience drastic fluctuations. Generally, a highly volatile stock is associated with more risk, and extremely volatile stocks offer the possibility of fantastic gains as well as huge losses. Stock volatility may be of particular interest to options investors.

Various factors can contribute to a stock's volatility. If the overall market experiences a period of higher volatility, a particular stock's price swings may also increase. In addition, volatility within a company's industry can affect its stock price shifts. An unflattering news story can cause a company's stock price to drop dramatically, while rumors of a groundbreaking invention can cause it to rise.

A stock's volatility can change over time. For example, a company's stock price might begin to fluctuate upon news of an upcoming merger, then settle down after the merger is complete.

The beta value can be a helpful tool for investors trying to determine a stock’s volatility. The beta represents the volatility of a particular stock compared to that of the overall market over a period of several months. The stock's movement is calculated against a market index, often the S&P 500. A stock with a beta of 1 moves with the market, while a stock with a beta over 1 is subject to greater up and down swings and a stock with a beta less than 1 is less volatile. For example, if a stock has a beta of 0.5, it is half as volatile as the market. If the market goes up 20 percent, the stock will tend to go up 10 percent. On the other hand, if a stock has a beta of 2.0, it is twice as volatile as the market, so if the market goes up 20 percent, the stock can be expected to rise 40 percent, but if the market falls 15 percent, the stock price will likely fall 30 percent. Refer to this Forbes article for information about stock volatility as it relates to options.

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What Does Volatility Mean When Referring to Stocks?

What Types of ETFs Are Available?

Hundreds of Investing & Finance Quizzes, Including

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