Many investors fear volatility because of the systemic risks that it brings. Other investors, on the other hand, think Guide to Inventing that volatility gives them some chance to have a more exciting trade. Whichever is the case for you, bear in mind that volatility will never go away and the market would be at a standstill if volatility disappears.
Volatility takes different forms, and there are factors you should consider. High volatility can be triggered by different things, and we have listed down some of those things. Read on!
Price volatility refers to the fluctuations in the price of the stock or security in connection with the law of supply and demand. There are some Contract for Difference things you have to consider when determining the price volatility of an asset.
The price of a product or asset can be affected by seasonality. This is why you see some businesses performing quite well during one season, for instance, summer, but slump to its feet during another season.
The company’s stock value, then, grows in price when it’s its peak season, while declines during down times.
Aside from the seasons, the daily weather can also affect the price volatility of a product or security. This is because the weather can also affect the supply and demand.
This can be thoroughly observed in the prices of commodities and in the agricultural sector, which is largely dependent of the quality of weather.
The weather should be good enough or the crops would be stunted, resulting to a loss in profit for those who invest in real estate and consumer goods.
Another factor that hugely affects price volatility is the emotions of the investors and people in general. Remember that the stock market is run by investors’ sentiment and emotions, hence the bull market and bear market.
Every time investors become concerned about a particular investment or issue surrounding an investment, all industries and sectors linked to the issue will certainly be affected.
Take a look at commodities again and notice that whenever geopolitical issues hit the headlines, their prices become severely unstable, thus extremely volatile.
Aside from the price volatility, another kind of volatility you should consider is the stock volatility. Some stocks are quite steady while others are extremely volatile.
Bear in the mind that the more volatile stocks are usually the riskier ones. To give it an upside, there’s always that adage that says riskier stocks are usually the more rewarding ones i.e. more profits. This is something aggressive investors count on whenever they’re betting on a risky stock.
Beta: Measure of Stock Volatility
In order to gauge the volatility of a stock, you need to use the beta, which is a statistical measure that tracks the volatility or systemic risk of the security while comparing it to a benchmark index.
The beta attempts to tell you how interrelated the stock’s movement and the index’s movement are. For instance, if the stock’s beta is 1, this means that its movement is 100 percent alongside the movement of the index. If it’s higher, it’s more volatile than the index. And if it’s lower, it’s less volatile.