Market volatility can rattle investors, but it’s a normal feature of long-term investing. Getting to know the causes of market volatility can help you stay disciplined and stick with your investment plan.
Volatility is a measure of how fast and far stocks’ prices move — up or down. It can be a good or bad thing for an investor, depending on whether the increase in price movements increases your chance of experiencing losses or if it gives you trading opportunities.
One way to look at market volatility is through the CBOE’s VIX index, or “fear index.” Its readings indicate how much investors are betting that stocks will fall, and can be useful in predicting future volatility. Historically, high VIX readings have been linked to economic uncertainty, such as from pandemic worries, inflationary pressures or rate hikes.
Another way to look at a stock’s volatility is through historical volatility (HV) and implied volatility (IV), which are calculated by looking at the price fluctuations of the underlying security over the past. These measurements are based on a stock’s performance, and express how far its price has moved from its average.
A stock’s volatility can also be influenced by its type and industry, as well as how it’s traded. For example, blue-chip stocks tend to have low volatility, while tech companies often have higher volatility. A stock’s volatility may also increase around certain events, like quarterly earnings reports or the release of important economic data.
