Stock market volatility refers to the wide range of changes in a security or index’s price over time. High volatility securities are more prone to price swings that can derail long-term goals. Understanding what causes this phenomenon can help you stay invested and remain calm.
While it can be unnerving, volatility is often the result of new information that prompts investors to change their expectations and pricing decisions. Some of these new factors may be geopolitical in nature, such as wars or tension between countries that can affect global economies and cause uncertainty. Others could be due to natural disasters or other disruptions that can send stocks sharply up and down.
One important indicator of expected volatility is the Chicago Board Options Exchange (CBOE) Volatility Index, known as the VIX. This is a measurement of the expected volatility in the markets over the next 30 days and is based on option prices.
There are also two other measurements that can give you an idea of the degree to which a security is volatile – historical volatility and implied volatility. Historical volatility (HV) uses real-world data to measure how much a security has fluctuated in the past, while implied volatility uses current market expectations as a gauge of future volatility.
Having the right strategy in place, taking a calm approach to investing and working with your advisor can all help you weather turbulence. It is important to remember that the ebb and flow of the stock market is normal and over the long term markets have historically recovered from large dips.
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