Volatility is the stock market's way of saying, 'we've hit turbulence'.
Imagine this: you’re mid-way through a particularly windy flight, the pilot announces on the mic, ‘passengers, strap yourselves in - we’re about to hit turbulence’.
Sub out the plane for the share market, and you for shares, and that’s volatility explained, kids!
Technically speaking, volatility is a ‘statistical measure’ of how large a share’s price swings around its average price.
The higher that share’s volatility, the more likely you will see big swings in share price. This could mean you make big returns - or big losses - in a short period of time.
A higher volatility = riskier share. Lower volatility = more stable share.
Volatility can ramp up during times of economic uncertainty. Like, a global pandemic.
This is because uncertainty can drive even the most confident investors to sell out of their stocks for fear of making more losses.
But major stock indexes don’t normally move by more than 1% in a single day. During COVID? Stock indexes were falling by more than 5% each day.
Scary times = more volatility.
While shares offer the opportunity to make some serious returns (or possibly losses too), they tend to be more volatile than other investments.
Let’s look at Afterpay as an example. It’s been a real rollercoaster ride. As you can see, the share price has been quite ‘volatile’ - in particular, at the peak of COVID, when it saw a drop in share price below $10 per share.
Source: Google
Many publicly traded companies can be volatile because their share price can change depending on a whole heap of factors:
Cash investments on the other hand, which can be things like term deposits and your own savings account as well as government bonds lower-risk investments. That’s because they’re less likely to lose money. However, they’re also likely to return less.
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