There are periods when the stock market goes up one day, and then goes down for the next five, then up again, and then down again. This trend is known as market volatility.
Volatility is the rate at which the price of a security increases or decreases for a given set of returns and is measured by calculating the standard deviation of the annualized returns over a given period of time. It shows the range to which the price of a security may increase or decrease.
If the price of a security fluctuates rapidly in a short term span, it is termed to have high volatility. If the price of a security fluctuates slowly in a longer time span, it is termed to have low volatility.
Volatility can be either a blessing or curse for investors, because it symbolizes a change in the market, which can leave investors with gains or losses depending on the final outcome. Volatility also goes hand in hand with risk – the more volatile the market is, the greater the risk for the investor.
Some Causes of Stock Market Volatility
- Price of exchange rates
- Prices of stocks and bonds
- Investor confidence in the economy
- Uncertainty – which could be negative media about a certain stock or stocks?