Understanding Stock Market Volatility And How It Affects Investor's Top Picks

One of the most misunderstood concepts in investing is stock market volatility. Simply put, volatility is the range of price changes experienced by a security over a given time period. The security has low volatility if the price remains relatively stable. A highly volatile security experiences rapid highs and lows, moves erratically, and experiences rapid increases and dramatic falls.

Because people feel the pain of loss more acutely than the joy of gain, a volatile stock that moves up and down as frequently as it does down may appear to be an unnecessarily risky proposition. However, seasoned traders understand that market volatility provides numerous money-making opportunities for the patient investor, which the average person may not.

Investing is inherently about risk, but risk works both ways. Each trade carries with it the risk both of failure and of success. Without volatility, there is a lower risk of either. Investing is inherently risky, but risk works in both directions. Each trade carries the risk of both failure and success. There is less risk if volatility is absent.

Calculation Of Volatility

The standard deviation of a stock’s annualized return over a given timeline showing the range in which a price might increase or decrease is calculated on the fluctuation of prices. Hitting new highs and lows, it is known that high volatility is attained. When the stock price moves higher or lower, the relative stability is said to have low volatility.

In historic days, volatility was calculated by using a series of previous market prices, the volatility implies and expects future volatility with usage of market traded options using the market price.

Factors Strengthening Volatility Includes -

Political & Economic Factors

Government plays a top-notch role in the regulation of industries and impacts the economy when that decisions on trade agreements, legislation and policy. Everything that starts from speeches to elections can cause reactions among investors, which influence stock prices. Economic data plays a pivotal role, when the economy is performing with world-class results, investors tend to react with positive notes.

Market performance is impacted by month-wise job reports, inflation data, consumer spending figures and quarterly GDP calculations. In comparison, the markets miss expectations, and the markets become more volatile.

Industry and Sector Factor

Specific events are causing volatility in industry and sector specifics. In the sector of oil manufacturing, for example, a major weather event in a top-notch oil-producing location is subjected to oil prices increase. As a consequence, the prices of stock for oil distribution-related companies may evolve, as they would be projected to benefit, while those that have a high cost of oil within their business may decrease. In parallel, more government regulation in a specific industry might result in stock prices falling, because of increased compliance and employee costs that may impact future earnings growth.

Company Performance

Relating to an individual company, volatility isn’t always market-wide. The positive news is that a strong earnings report or a new product which is attracting consumers can make investors feel better about a business. When a group of investors finds ways to search for that, the increased demand can help in raising the stock price. In comparison, a product that has a data breach, or bad executive behaviour can hurt a stock price, as investors sell off their stocks. On dependence on how large a company is, the positive or negative performance can also include an impact on the broader market.

Volatility Can Mean Opportunity

Volatility not being a bad thing as always, it can sometimes provide entry points from which an investor can take advantage. Volatility in a down market means investors that believe markets will be performing well in the long run for buying additional stocks in companies that they like at lower prices. A simple example includes an investor buying a stock for $50 that was worth $100 within a short time before, getting the stock's average cost-per-share lower which helps in the improvement of the portfolio’s performance when markets eventually rebound.

The process is equivalent to when a stock rises quickly. Investors can take advantage of the same by selling out, the same proceeds of which can be invested in other areas that represent greater opportunity. Investing when markets are volatile, and valuations are more attractive, can give investors the potential for generating strong and long-term returns.

Importance Of Vision In Leadership

Investors that focus on the long-term tend to be lower in concern with volatility. There are three reasons why having a long-term investment strategy is certain in considering the worth of -

• Finding Time in Difficult Business Junctions It is virtually impossible to predict of exact top or bottom of a market that will be. When investors try to ‘time the market’, they run the risk of buying high and selling low. The bad timing can further exacerbate the losses during volatile times, which is why investors would typically be better off staying the course, than attempting to time things that did not do well.

• Big Impacts On Best Days History shows that the stock markets often correct after three-downward waves. The investors that exit might be missing the best recovery days and most attractive buying opportunities, which can have a significant role in longer-term returns. Remaining investments are completed when volatile nature usually benefits a person when it takes a long-term view.

• Companies Need Time For Betterment Companies with quality and strong fundamentals generally do better when economic conditions slow down or market volatility increases. Investors might be better off to weather the storm or the companies often might come out even stronger, even when the market takes off for a while or is reflected in the stock price.

Conclusion

In similar market stature, stock prices that are included for growth can get ahead of themselves and move up at a rate that is exceeding the fast rate for becoming sustainable. With prices fluctuating, the opportunities provided to investors for investment in a growing company are a discounted price and wait for not exiting the investment. Through understanding volatility and its causes, investors can potentially take advantage of the investment opportunities that are provided for the generation of better long-term returns.