What is volatility? Definition, causes, significance in the market

  • With investments, volatility refers to changes in an asset's or market's price — especially as measured against its usual behavior or a benchmark.
  • Volatility is often expressed as a percentage: If a stock is ranked 10%, that means it has the potential to either gain or lose 10% of its total value. The higher the number, the more volatile the stock.
  • Though volatility isn't the same as risk, volatile assets are often considered riskier because their performance is less predictable.

If you're thinking about investments, one term that you've likely heard thrown around a lot is “volatility.”

In the non-financial world, volatility describes a tendency toward rapid, unpredictable change. When applied to the financial markets, the definition isn't much different — just a bit more technical.

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Market volatility is defined as a statistical measure of a stock's (or other asset's) deviations from a set benchmark or its own average performance. Loosely translated, that means how likely there is to be a sudden swing or big change in the price of a stock or other financial asset.

Not surprisingly, volatility is often seen as a representative of risk in investments, with low volatility signaling safety and positive results, and high volatility indicating danger and negative consequences.

Think of it like riding a bicycle. You're never guaranteed a safe ride when you get on. Little occasional wobbles…

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