What Is Volatility, and Why Should I Care About It?


Investing in the stock market always involves taking risks. Whereas putting money into a savings account will actually net you more money without decreasing your balance, your stock’s value can go up and down by the second.

The ability for the stock market to increase and decrease at unpredictable and sometimes rapid rates is called volatility. Volatility is a factor that you should always look into before putting any money into a stock. That’s because if you buy something has the chance to make major gains in a short amount of time, it also has the chance to take major losses.

However, there’s a lot more to volatility than simple, sharp ups and downs. If you know what to look for, you could save yourself from making a risky investment.

Volatility is how a stock/investment moves up and down in price.

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Shutterstock

If a stock has high volatility, it has higher risk. Prices can fall and rise sharply.

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Shutterstock

If a stock has low volatility, it makes small price movements and comes with a lower risk.

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Shutterstock

Stocks with low volatility still increase and decrease in price, but at less severe increments.

Volatility essentially shows you how much you stand to gain or lose during a trading day.

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Shutterstock

If you invest in a highly volatile stock, your investment could quickly lose a portion of its value. Or gain in value. No one really knows.

For instance, if a stock is highly volatile and is currently selling at $40 a share, there’s no telling if it’ll go up to $45 a share or down to $35 in the same day.

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Shutterstock

When the stock market or a particular stock is highly volatile, you have the chance to gain a whole lot. You also have the chance to lose a whole lot.

You could play it safe and invest in low volatility stocks, but you might not make as much as you would in highly volatile stocks. Just remember: invest in what you’re comfortable in, and don’t ever think you can predict the future of an investment based on volatility. If you go in with that mindset, you’re going to have a bad time.

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