Market Volatility: The Basics

Market Volatility is a statistical measure that has been analyzed keenly by key players in the market. It refers to the dispersion of returns for a certain stock or index. The standard measurements used to measure volatility in its basic form are standard deviation and variance. Another perspective would be that market volatility is the fluctuation of stock prices. A state of low volatility means that there are small fluctuations in the market whereas the state of high volatility means that there are large fluctuations. The markets here could either be stocks, bonds, commodities, or currencies. Their movements, on the other hand, are considered to be either upward, downward or sideways. In financial lingo, these movements are called bull markets, bear markets, and range-bound markets respectively. Volatility measures the uncertainty or risk that’s brought about by changes in the value of a security. When you hear such statements such as high volatility, it basically means that the price of a security is likely to change abruptly in any direction over a short period of time. On the other hand, low volatility signifies that the price of the security is likely to change, but not as abruptly. It will change steadily and over time. A number of measures are used to measure the volatility of a stock. The popular measure is using the stock beta. With the beta measure, volatility is determined by comparing the total returns of the security in question with a relevant base point. Normally the S&P 500 is used as the benchmark. When you have invested in a highly volatile market, there are some strategies you can employ to counteract this volatility.

Diversification of Portfolio