The first thing you’ll need to know about volatility is this: the higher the volatility of a stock is, the riskier the security will be. Volatile stocks are stocks that are simply considered to be highly risky and fluctuate in value more than other investments. To understand what this all means, it’s important to define what volatility means in the market sense.
What is Volatility?
Volatility is simply a statistical value that measures the range of returns for a given security or market index. It measures this dispersion through standard deviation or variance between returns. A stock’s volatility is equal to the amount that particular stock will separate from the original price at which it was traded. When volatility is high, the dispersion will be wider as well as the price range. The opposite goes for a low volatility stock. This carries the basic logic of trading and investing: the higher the risk, the better the returns will be.
You’ll have to remember that the standard deviation could go both ways—positive or negative. A highly volatile stock may be spread out over a large range of values, so this means that the price of the security can dramatically increase or decrease at any given short amount of time. You could then surmise that lower volatility stocks tend to be steadier over time, considering that the value of security, as measured statistically by the standard deviation, does not fluctuate as dramatically as highly volatile stocks do.
One particular measure of relative volatility that many investors find useful is the stock’s beta. A beta is the direct approximation of a security’s overall volatility as put up against a particular benchmark. Most of the time, the S&P 500 is used for this purpose. For example, if a stock has a beta value of 1.1, this means that it has moved 110% for every 100% benchmark move. If the stock has moved 90% for every 100% benchmark move, then its beta will measure .9.
The good news for traders is that volatility can be calculated for every stock using variance and standard deviation. It’s a statistical process that could prove to be elaborate for some, but once you get a grip on it, it’ll make a big difference in the way you approach investing and trading.
Should You Invest in Volatile Stocks?
The upside to investing in volatile stocks is obvious. The returns have more potential of being higher. If you invest in highly volatile stocks, you’ll have a greater opportunity to make bigger profits. In addition, volatility doesn’t only impact gross profitability. In fact, it can also make an impressive difference when it comes to net profit. In short, if you want to create massive income through trading and investing, you’d have to be willing to create a larger profit margin, and the only way to do this is to take the risk against volatile stocks. Part of the gamble is that you have to do this even if profits are not guaranteed. Stocks that only move in short ranges can only bring you chump change.
This is the reason why many investors and traders seek out the most volatile stocks in the market. Some of the most volatile stocks currently are in the energy and medical industries. There are plenty of resources available online to assist traders in finding the most up to date information on which stocks are highly volatile and which stocks are not.
In conclusion, you need to see volatility this way: without volatility, there’s no trading. If you want to be a successful trader, you’ll need to master the concept of volatility and put it into practice when you’re investing. Many people even do it just to look for some action in the market. It’s definitely more challenging and more rewarding to practice trading using volatility as a key determinant of stock selections. The upside of larger profits is very attractive, but if you’re going to take volatility into consideration, make sure you consider the magnitude of loss as well. If you can imagine a great possibility of gain, you should also imagine an even greater possibility of loss. You’ll have to use your trading abilities in order to prevent that, but it shouldn’t stop you from investing in the most volatile stocks you could ever find in the current market.
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Written by Garrett Parker
Read more posts by Garrett Parker