What is market volatility?
Volatility is a term used to describe the fluctuation in the price of a financial asset, such as a stock, over time. These market fluctuations can be influenced by a variety of factors, including market conditions, economic indicators, and news events. For example, a sudden change in interest rates or a natural disaster can cause a spike in volatility as investors react to the changing conditions.
How is market volatility measured?
Economists and financial professionals measure market volatility by the standard deviation of an asset’s returns. Standard deviation is a statistical measure used to quantify the amount of variation or dispersion in a set of data. In financial markets, it is commonly used to measure the volatility of an asset by calculating the deviation of its recent returns from the average historical returns.
A high standard deviation indicates a large amount of volatility, meaning the asset’s returns are widely dispersed, while a low standard deviation indicates low volatility and more stable returns. Standard deviation is a useful tool for investors to assess the level of risk associated with a particular asset, as well as to compare the volatility of different assets.
Risk vs. reward
Volatility really is a double-edged sword with potential risk of loss as well as opportunity for large gains for market participants. Investors often view volatility as a risk factor, as it can result in significant losses in a short period of time. On the other hand, high volatility can also provide opportunities for short-term traders to make quick profits by taking advantage of price swings. During a period of high volatility, investors may be able to purchase stocks at a discount and then sell them at a higher price when the market stabilizes.
Mitigating risk
Investors can use a variety of strategies to manage the risk associated with volatility. One approach is to diversify your portfolio by investing in a mix of assets with different levels of volatility. This can help to reduce the overall risk of the portfolio, as the impact of a sudden price change in one asset will be offset by more stable price movements in other assets.
Talk to an investment professional
As you can probably see, investing does require significant knowledge about how the markets work. Deep understanding of economics as well as being well-versed in fundamental and technical analysis is essential for making the right investment decisions. Many people who do not already have this knowledge or do not have the time and energy to manage their own portfolio may want to consult with a financial advisor who can help shape a portfolio to meet your specific wealth management objectives.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Working with a financial professional does not ensure a favorable outcome. Diversification and asset allocation does not ensure a profit or protect against a loss.