Before you can understand the importance of volatility, it’s necessary to have a comprehension of this term in relation to investing. Essentially, volatility refers to the activity of a particular stock. It involves how frequently the stock shows activity and the direction it goes in terms of its price. When the price stays within a close range, the stock has low volatility. When there’s a broader range of price changes in a shorter period of time, the stock is highly volatile.
How Does Volatility Affect the Stock Market?
Volatility is also applied to the entire market as a whole. If the value of the market rises or drops significantly within a period of time, the market is highly volatile, but a market that only moves a few points within a day has low volatility. These changes in the market can be used to predict how it will fluctuate in the coming days or weeks. High volatility suggests individual stock prices will generally drop in the near future. By the same token, low volatility will likely precede a period of rising stock prices.
These fluctuations are important to watch because they help investors manage their portfolios with better precision. By watching volatility, an investor can create a strategy that will allow them to take advantage of changing stock prices. In general, they would buy after a period of high volatility when stock prices are at a low. They would also wait to sell stocks until a period of low volatility has led to an increase in stock prices.
What Factors Influence Stock Volatility?
There are several factors that influence how market prices fluctuate, and those fluctuations will be different for each type of stock. For instance, hotels and other hospitality stocks will drop at a greater rate in the winter and fall, while rising again in the warmer seasons. In addition to seasonal volatility, some stocks will rise or fall as the result of weather patterns. If a recent storm destroys a large amount of a certain crop, those stock prices will drop accordingly. A better than average crop will affect the market in the opposite way.
By understanding the factors that affect market volatility and how that volatility affects stock prices, you can invest more wisely. If you’re not an experienced investor, a financial advisor with a better grasp of market volatility can help you make wiser investing decisions. Together, you and your advisor can use volatility to grow your wealth.