The relative rate at which the price of a security moves up and down. Volatility is found by calculating the annualized standard deviation of daily change in price. If the price of a stock moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility.
n other words, volatility refers to the amount of uncertainty or risk about the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security’s value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.
What is Stock Volatility?
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.
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.
Measuring Stock Market Volatility
VIX Measures
“VIX continues to provide a minute-by-minute snapshot of expected stock market volatility over the next 30 calendar days. This volatility is still calculated in real-time from stock index option prices and is continuously disseminated throughout each trading day.”
The VIX measures the amount of volatility contained — at any moment in time — in option premiums. In its original form, the VIX was constructed by using a weighted average of the implied volatility of the at-the-money and near-the-money options on the S&P 100 index.
The VIX is quoted in terms of a number between 0 and 100 — and normally trades at the far lower end of that range. For instance, as of the close of trading on Monday, June 19 the VIX was at 17.83.