What is Stock Volatility?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 12 May 2020
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Stock volatility refers to the potential for a given stock to experience a drastic decrease or increase in value within a predetermined period of time. Investors evaluate the volatility of stock before making a decision to purchase a new stock offering, buy additional shares of a stock already in the portfolio, or sell stock currently in the possession of the investor. The idea behind understanding stock volatility is to arrange investments so that a maximum return with minimal opportunities for loss is achieved.

There are number of factors that can impact stock volatility. One of the major concerns is the stability of the underlying assets supporting the stock issue. For example, if public confidence in a corporation should suddenly decrease, there is a good chance that the stock issue will also experience a significant drop. The cause for the change in public perception may be something as simple as a pending merger or a change in leadership. When that is the case, the stock may begin to recover in a short period of time as the public begins to perceive the corporation as being stable once again. Investors may choose to ride out the short period of value decrease in anticipation of a recovery and potential increase to new levels once the slump is complete.

However, if the factors leading to a substantial decrease in unit price are of a more enduring nature, investors may consider the degree of stock volatility to be unacceptable. In this instance, the investor is likely to avoid purchasing any shares of the stock and will take steps to sell any shares currently in the portfolio as a means of minimizing losses before the unit price falls any lower.

Stock volatility may also be influenced by situations that are impacting the stock market in general. Market volatility can take place when consumers begin to lose confidence in the economy, or when political issues cause investors to become more conservative in their trading activity. When these factors are severe enough, even individual stocks that remain in favor may find their trading activity minimized while investors wait to see how the political or economic issues are resolved. Until then, any stock options traded on the market are subject to sudden and often drastic shifts in value.

Investing activity requires that investors, brokers, and other involved in the process be aware of the degree of stock volatility associated with any given stock. In addition to the current status, investors will often look into the history of the stock as a means of identifying factors that definitely impacted the volatility of the stock in the past. When coupled with projections on the future trends of the stock and of the marketplace, it is relatively easy to ascertain if the stock volatility is within acceptable limits, and allow the investor to make an informed decision about any trading activity.

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