What is Volatility and How Does It Affect The Stock Market

If you even have slight information about the stock market you must have heard the term stock market volatility some time or the other, especially when there are rigorous market movements. Despite having heard the term quite often, most of us fail to understand what this term exactly means.

Stock market volatility plays an essential role in an investor’s trading journey. Stock market volatility has multiple applications and has a significant impact on your trades and investments. Before we move on to understanding how volatility affects the stock market, let us first have a brief understanding of what volatility exactly means.

What is Volatility in Stock Market?

The values of our investments are bound to change, and sometimes they change unexpectedly. The stock market is a perfect example depicting stock prices changes through daily fluctuations. Stock prices change either in small or large amounts. The term volatility defines these variations in stock prices.

Thus, volatility measures the degree of change in the price of an investment over a particular time frame. For instance, a fairly consistent stock price represents a less volatile stock. On the other hand, a highly volatile stock marks quick and regular price changes. High volatility makes an investment riskier also offering it a great potential for both gains and losses.

To determine the volatility of a particular investment one should look at the price variations from one day to another along with the largest monthly or quarterly gain or loss in the investment’s price.

Calculation of Stock Market Volatility

 Standard deviation and variance are commonly used to calculate volatility. The standard deviation is the square root of variance. A stock’s volatility is calculated by Beta. Beta is an approximation of the volatility of the returns generated by particular security against the benchmark index’s returns.

How Volatility Affects Traders Sentiments?

Financial data analysis for investing requires you to analyze market sentiments as well. The stock market is stochastic in nature. This means that the prices of all the stocks and assets will move up and down naturally on a daily basis. Despite this, billions of investors and traders put their hard-earned money in stocks for earning returns. A direct relation between risk and return and volatility keeps investors keenly interested in the market volatility. This means high volatility ensures higher chances of returns along with higher risk.

How to Deal With Stock Market Volatility?

Here are few ways to deal with stock market volatility

Ignoring short-term volatility

Timing the market to decide when to enter and leave the market is nearly impossible. You can consider holding your investment during volatile market sessions based on your investment plan and time horizon of investment. You can easily mitigate the risk associated with market volatility by investing in a well-diversified portfolio.

Spread Out Risk Through Regular Investments

You can mitigate the impact of volatility by investing a set amount regularly. Investing a certain amount regularly averages out the investment cost. Investors can avoid the risk of lump-sum investment at any time as it may later turn out to be the peak.

Considering Good Investment at a Good Price

Market volatility provides you an opportunity to invest in the stocks of good companies that perform well over time at a discounted price. However, before investing in any company, it is essential for you to research a company’s true upside potential. It is also crucial that your time-horizon and investment strategy both support buying during volatile market sessions and allow you to wait for growth.

Get Expert Advice

If market volatility is keeping you up late at night and is stressing you out regarding your investment, you need to get in touch with a specialist. A stock market specialist helps you in developing investment strategies to gauge the stock market ups and downs more comfortably.

Bottom Line

Stock market and volatility go hand in hand. It is completely an investor’s decision whether to be afraid of volatility or try to make the most out of it. If you a newbie to the world of stock market investing, you should stay away from volatile market sessions as they can wipe out a significant portion of your portfolio investment. However, if you still want to try your luck in market investment and want to extract returns, you should get the services of a SEBI registered stock advisor like one of our RMoney experts, who will not only offer you hand-holding support but will also offer you research-based stock recommendations for trading.

About Author