Stock volatility is the likelihood of a stock experiencing a significant increase or decrease in value within a set period. Investors consider volatility before buying or selling shares, with factors including stability of underlying assets and market conditions. Understanding volatility is key to maximizing returns and minimizing losses.
Stock volatility refers to the chance that a given stock will experience a drastic decrease or increase in value within a predetermined period of time. Investors assess the volatility of stocks before making a decision to buy a new stock offering, buy additional shares of a stock already in the portfolio, or sell shares currently held by the investor. The idea behind understanding stock volatility is to organize investments in a way that maximizes return with minimal opportunity for loss.
There are several factors that can affect the volatility of stocks. One of the main concerns is the stability of the underlying assets that support the issuance of shares. For example, if public confidence in a corporation suddenly declines, there is a good chance that stock issuance will also experience a significant drop. The cause of the change in public perception can be something as simple as a pending merger or a change in leadership. When that’s the case, shares can start to recover in a short period of time as the public begins to perceive the corporation as stable again. Investors may choose to ride out the short period of decline in value in anticipation of a recovery and potential rise to new levels once the decline is complete.
However, if the factors leading to a substantial decline in the unit price are of a more lasting nature, investors may find the degree of volatility in the shares unacceptable. In this case, the investor is likely to avoid buying shares of the stock and will take steps to sell the shares currently in the portfolio as a means of minimizing losses before the unit price falls further.
Stock volatility can also be influenced by events that are affecting the stock market in general. Market volatility can occur when consumers begin to lose confidence in the economy or when political issues cause investors to become more conservative in their trading. When these factors are severe enough, even individual stocks that remain in favor can see their trading diminished while investors wait to see how political or economic issues are resolved. Until then, stock options traded on the market are subject to sudden and often drastic changes in value.
Investing activity requires investors, brokers and others involved in the process to be aware of the degree of stock volatility associated with any given stock. In addition to the current state, investors will often look at stock history as a means of identifying the factors that definitely affected stock volatility in the past. When combined with projections about future stock and market trends, it is relatively easy to determine whether stock volatility is within acceptable limits, allowing the investor to make an informed decision about any trading activity.
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