Back to Basics: Understanding the Good and Bad of Stock Volatility

This is the second article in the "Back to Basics" series. The first, "Understanding Investment Objectives" can be viewed here.

Volatility is a crucial factor when investing, particularly in stocks. It can be a game-winner or a game-breaker. You can come to a general consensus that stocks are going to be more volatile than mutual funds or bonds, but that's about as general as you can become. Volatility wavers between different stocks and sectors, so it's best advised to research beforehand. Some sectors, like energy and technology are more volatile than others. In fact, the NASDAQ (which consists of many technology and internet based stocks) has dropped more than 1,000 points in about 3 weeks. This doesn't mean the NASDAQ is volatile, but it helps come across the point that the technology sector is pretty volatile.

Like anything, volatility changes with the time period. After 9/11, or at the height of the Coronavirus pandemic, airline stocks saw a sharp decrease in price. If you're looking for a high risk, high reward situation, volatile stocks are for you. If you're looking for a longer investment, you would want to try less volatile stocks or even mutual funds. Think about it: the more volatile a stock is, the more chance it has to shoot up in price. However, this principle applies when considering the stock dropping. A volatile stock will also go down heavily in price, because volatility doesn't just apply to positive gains.*

Lastly, a great way to measure stock volatility is using something called the "VIX Index." It's important to note that the VIX is tracking the S&P 500, which is commonly seen as the most accurate American Stock Index. The VIX isn't a volatility calculator for a specific stock or index. It simply tracks the S&P 500.

Summary: Volatility can affect you positively and negatively, on both ends of the spectrum. Some sectors are more volatile, and you need to evaluate your investing objective, and your risk tolerance. The VIX measures the volatility of a popular index, and an overall great indicator of American markets, the S&P 500.

*BizRoca is not giving financial recommendations. These are our opinions. For serious financial recommendations, consult a financial expert.

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