Price fluctuations, risk, long-term, potential returns – have you understood everything? You’ve probably heard of the term volatility, but exactly does it mean? A detailed explanation is provided here.
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Put it simply, please! Volatility
What is meant by volatility in relation to financial investments? Joel Schmid explains it in 45 seconds.
Definition of volatility
Volatility is a statistical measurement that concerns the range of fluctuation of an investment or the upward and downward trends of the price. It indicates the extent to which the value of an investment or an index can change in relation to the average price. For instance, the higher the volatility, the greater the deviation of the share price from its mean value. Shares, for example, tend to have greater fluctuations, i.e. higher volatility than bonds – which means their prices fluctuate more. The volatility also reflects the risk that an investor assumes when purchasing the asset. This means that a volatile investment also entails greater risk. However, this can generally be smoothed out by a long investment horizon.
Volatility arises from different drivers
Volatility arises both from long-term price effects and from one-off situations and events. The main drivers of intermittent volatility are investors’ actions and reactions. There is often a reaction to uncertainty, such as unexpected events, which is reflected in the prices on the stock market.
Volatility generally keeps the market on its toes and can be used as an entry and exit point for investors. In particular, traders who are focused on short-term deals benefit from volatility and the opportunities it affords. Investments that are less exposed to fluctuations are more suitable for less experienced investors. Funds are an exciting way to invest, for example – they enable you to invest not just in one asset, but in several.
This is called diversification, and you can find out more about it in our article “Diversification – why you shouldn’t put all your eggs in one basket”. Want to find out more about price fluctuations? Read our article entitled “Why prices fluctuate?”.