Stock market volatility is a fluctuation in the prices of shares and other investments. It happens when large numbers of people are buying or selling in a short period of time. For example, the price of a share could change a lot because of a news story about a company, or because of concerns over economic growth or inflation. Traders who trade in the financial markets deal with this type of volatility every day.
The higher the volatility, the more significant the price changes. Different types of assets have different levels of volatility. For example, a utility stock has less volatility than a technology stock because it tends to be more stable. A stock’s beta also influences its volatility. It indicates how much a stock moves in relation to a benchmark index, such as the S&P 500 Index. A stock with a beta of 1 moves more than the index when it rises or falls, while one with a beta of 0.8 moves only 80 percent for each 100 percent move in the index.
People react to volatility differently. Buy-and-hold investors who invest for the long term tend to treat it as background noise and focus on accumulating incremental returns over years, or even decades. Day traders and options traders are more focused on volatility, which can occur over shorter periods of time, in days or seconds. They use tools such as technical analysis and hedging strategies to profit from volatility, which can be risky and cause anxiety for some investors.