Market volatility has been on everyone’s lips since the beginning of the pandemic. While it can be troubling for investors, it indeed opens good prospects for StockBattle entrants. How so? Let’s look into the metric.
What Is It?
Market volatility is the amount and frequency of price movements. The bigger and more frequent the price swings (up or down), the more volatile an asset is deemed to be.
Causes of Volatility
There are three main factors that cause price volatility; weather, seasonality, and emotions. Like a third wheel, they interfere with the balanced relationships between supply and demand. The last factor, emotions, may come as a surprise, but it’s true. When investors worry, they cultivate volatility on the market. That’s why stock prices are so hectic.
In financial analysis, volatility usually means one thing — the standard deviation (hey, math brain), which is a measure of how spread out the prices are from the average. The wider the spread, the higher the standard deviation, the more volatile the asset.
For gauging the individual stock, there’s a metric called beta. It measures a stock’s historical volatility (how volatile the stock has been over the past 12 months) relative to the S&P 500 index.
Market volatility can be also seen through the VIX, Volatility Index (or “fear index”), which is the most renowned measure of stock market volatility. It gauges investors’ expectations about the price movement over the next 30 days derived from S&P 500 options trading.
Why Does It Matter?
Volatility is a boon for StockBattle entrants, the drive of competitions. However, it’s good only when it’s on the increase. So volatility is one more factor that requires consideration before each portfolio draft. Seems like a lot of work? Only in the beginning. The sooner you start delving into stock market metrics, the quicker you’ll be able to make effective portfolio drafts.
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