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What is Volatility?

Volatility in this case we refer it to stock volatility. It refers to the increase in swings from the top to the bottom at a predetermined time frame.

There are number of factors that can impact stock volatility. One of the major concerns is the stability of the underlying assets supporting the stock issue. For example, if public confidence in a corporation should suddenly decrease, there is a good chance that the stock issue will also experience a significant drop. The cause for the change in public perception may be something as simple as an earnings warning or a change in leadership.

However, if the factors leading to a substantial decrease in unit price are of a more enduring nature, investors may consider the degree of stock volatility to be unacceptable. In this instance, the investor is likely to avoid purchasing any shares of the stock and will take steps to sell any shares currently in the portfolio as a means of minimizing losses before the unit price falls any lower.

Stock volatility may also be influenced by situations that are impacting the stock market in general. Market volatility can take place when consumers begin to lose confidence in the economy, or when political issues cause investors to become more conservative in their trading activity. When these factors are severe enough, even individual stocks that remain in favor may find their trading activity minimized while investors wait to see how the political or economic issues are resolved. Until then, any stock options traded on the market are subject to sudden and often drastic shifts in value.