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What is Stock Volatility?

Volatility is the rate at which the price of a stock increases or decreases for a specific set of returns. Simply stating, Stock Volatility is a reflection of the degree to which the underlying security's price moves. Volatility measures the frequency and size of security's fluctuating price movements. Quick fluctuation of stock price in either direction is deemed as volatility. In the aspect of the stock market, Volatility is the rate of fluctuations in a company's stock price.

Stock Volatility is typically measured calculating either standard deviation or variance. For both methods, the higher the value, the more volatile are the stock prices or the returns.

A high standard deviation value indicates that prices are spread across a wide range, and oppositely, a low standard deviation value shows that prices are closely tied to a narrow range. High standard deviation suggests that stock prices can vigorously rise or fall, whereas low standard deviation suggests the opposite. Typically a surge or dip of 1% in stock market indexes is characterized as a 'volatile' market.

A security with severe price fluctuations that means price reaches new highs and lows in repetitions, or moves hectically is called a highly Volatile stock, whereas a stock which bears a relatively stable price has low volatility.

Is high Volatility bad or good?

High Volatility in stock price often can trigger meaningful opportunities for entering the stock, especially for Day Traders, accordingly volatility is not necessarily a drawback. During volatile period of a stock, Day Trader is apt to determine the entry point precisely, he or she can exploit the volatility and price fluctuations. On the other hand, good to keep in mind, high volatility often implies risk or leaving the investors with doubts, how the stock price will move.

What do Stock Price Fluctuations and Volatility cause?

Though there are multiple reasons, in general positive stock market news or company-related stock ticker news, such as a strong earnings report, dividend payout, business achievement or an approval for a product or project issued by FDA NDA, etc. that can cause market sentiment to elevate because investors feel great about a company, sector or industry. If many investors buy a stock or more stocks right after news release, the increased demand will end up in price-rise.

Volatility Is Also How Quick Price Moves

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Conversely, bad news, firing of a chief executive, product recall, class-action against the company can significantly ramp down the stock price, as investors sell off their securities along with gloomy prospect. Depending on company's market capitalization, good or bad news, and the inherent positive or negative stock performance can affect the broader market.

Though Volatile market carries higher levels of risk, investing when markets are Volatile can give stock traders tremendous opportunities to make strong returns

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Day Traders that buy and sell stocks usually in one trading day, typically seek highly Volatile markets and stocks to take advantage of short-term price movements marked with large fluctuations. Backed by a well-developed Day Trading strategy that involves sophisticated risk management, Intraday Traders can realize sharply higher returns than investors with longer time horizon. Because often both bad and good news - that is sometimes hard to tell apart - can result market turmoil, Volatile markets and highly fluctuating stocks necessitates more meticulous stock analysis and study of stock charts to avoid arriving at loss due inadequate timing and incorrectly determined entry and exit points. Also in Day Trading technical indicators plays a vital role to better understand market trends shaping up in the wake of Volatility.

If a stock price is continually fluctuating, selling the investment for a profit requires properly market timing to be prevented from unexpected adverse trend turns.

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