When we think of the stock market, we think of its volatile nature. Unpredictability is the essential part of the market. Stock market volatility is the relative rate at which the price of a security goes up and down. There are many definitions of volatility, but in layman's terms volatility is "the rate and magnitude of price changes", it is the speed at which prices move. Volatility is low when the market moves within the range of exchanges.
The current market deals directly with volatility through options and variance swaps. Accounting for the annualized standard deviation of the daily change in prices leads to an assessment of volatility. Put simply, if the price of one Stock rises and falls rapidly over short periods, its volatility is high. While the price hardly ever changes, it has low volatility.
Many investors believe that when volatility is high it's time to buy, but when volatility is low you shouldn't be entering the market. On the contrary, a number of studies have also shown that as volatility increases, the stock market is more likely to suffer losses. Basically, when the stock market goes up, volatility tends to go down. On the other hand, when the stock market goes down, volatility tends to increase. So if you follow the theory above, you should be more aware of market volatility when making buy and sell decisions.
Volatility is calculated by a simple mathematical term called beta which shows the volatility of the security relative to the market. The beta measures the American list stocks and funds. A beta greater than 1 means that the stock or fund you are looking at is more volatile than the market in general. Beta measures this volatility risk for securities traded in the market, where information about securities is incorporated into prices.
The volatility index (VIX) is the most popular measure of stock market volatility. A high reading of the VIX marks periods of higher volatility in the stock markets. Weak readings over VIX branded periods of lower volatility. This index is important because it works easily with other market indicators. This indicator helps determine when there is too much optimism or fear in the market. By analyzing his message, traders gain a better understanding of investor sentiment, and therefore likely tipping points in the market.
Volatility is often seen as a negative term in the market that represents uncertainty and risk. Higher volatility worries investors because they see the value of their portfolios evolve dramatically and decrease in value. Volatility can also cause investors to react irrationally, selling when the stock price has fallen to a low level. You can earn a lot by knowing how to use volatility to your advantage. The key is not to be afraid and you need to make a rational decision on when to buy and sell the stocks.
However, volatility can be good in that if you buy on the lows you can make money. Short-term market participants like day traders hope to make money through volatility. The most successful investor in history, Warren Buffet, says volatility is not a measure of risk. Volatility offers investment opportunities. So you can have good shopping and earn money even when the market is down.