Stock volatility is an inevitable aspect of the stock market. It can just affect a few stocks, a sector, or the overall market. If you’re a day trader, this is likely a huge part of your strategy. This guide will break down stock volatility, if it is good or bad, factors that affect volatility and more.
Definition of Stock Volatility
In the most basic sense, stock volatility generally is considered to be the quick movement of a stock’s price in one direction or another. Usually caused by some sort of news catalyst, the stock makes big movements. A particular stock, or the overall market in general, can be considered volatile and is something that regularly occurs.
This may sound like a bad thing, but volatility is one aspect of a stock that day traders look for so they can capture rapid price change in a short amount of time to make a profit.
In a more technical sense, volatility is the comparison between a stock (or the market’s) average performance, and whether or not it is under- or over-performing. To do this, you would use a measurement such as a standard deviation, beta, or other indicators.
Is Market Volatility Good or Bad?
Stock volatility isn’t necessarily good or bad—it’s part of a regular market and should be expected. However, depending on your trading strategy, it could be beneficial or hurt your portfolio. If you’re a long-term investor, you probably don’t want to see volatility negatively affect your portfolio.
However, if you’re a day trader, volatility gives you a chance to make quick profits on rapid price movement. Since day traders buy and sell stock in a single day, they are not holding onto the stock and aiming for long-term growth, which lets them take advantage of short-term price movement.
Factors that Affect Stock Volatility
News is one of the biggest factors of market volatility—and what we do best here at Benzinga Pro. Whether it is politics, weather, acquisitions, clinical trials, product expansion, or other major news, it can affect certain stocks, sectors, and even the overall market.
For example, when the coronavirus (COVID-19) started to spread worldwide, the overall market saw poor returns, and even trading halts. Biotech and pharmaceutical stocks usually see volatility during clinical trial result announcements, FDA approvals and other related events.
Public companies are required to report on their earnings. These reports, given quarterly, give investors a look into how the company is doing, and how much they are making each quarter. This helps traders and investors get an idea of the growth expectations of the company. Earnings expectations miss or beats and guidance announcements/updates can cause volatility in the stock.
There are several economic data reports every month, including jobless claims, GDP, retail sales, and more. These reports give a sense of how well the economy is doing. If there is a surprise report, this can affect stock market volatility.
Interest rates have a huge effect on the market because they affect loans, mortgages, credit cards, savings accounts and more. The interest rates set by the Federal Reserve are highly influential on the market. Typically, a lower interest rate will cause an increase in stock prices, while a higher rate will cause a decrease.
Some stocks simply have a seasonality to them. For example, retail spending increases in November and December around the holidays, which affect retail stock’s earnings reports, usually in a positive manner.
How do I Calculate Stock Volatility?
Typically, it is measured using a standard deviation of a stock’s average price over a certain period of time. However, there are other methods of measuring volatility such as the VIX index or beta. You can even calculate volatility yourself.
Stock Volatility is commonplace in the markets and should be expected. If you’re a day trader, this is something you’re probably looking for in a stock. The quick, rapid price movement could bring you your next big trade.
Disclaimer: Benzinga is a news organization and does not provide financial advice and does not issue stock recommendations or offers to buy stock or sell any security. Benzinga Pro is for informational purposes and should not be viewed as recommendations. Benzinga Pro will never tell you whether to buy or sell a stock. It will only inform your trading decisions. You can find our full disclaimer located here.