Understanding a Volatile Market – The Cause, Effect, and Precious Risk-Gaining Ability

A volatile market may be like a rollercoaster ride.

Even one look at the ticker board can leave your head spinning as you attempt to keep up with its ever-changing ways. Just like Hollywood celebrities, stocks change partners regularly, and their prices shift as often as the local weather. Not every stock market represents stability but the good investor attempts to take its unsteadiness and put it to good use. Market volatility is no need for panic – it can actually end up being very beneficial for investors. Forrest Gump would correlate the unpredictability of a volatile stock market to a box of chocolates, “you never know what you’re gonna get.”

Volatile? Meaning What?

You may or may not have heard of the word volatility. It is a synonym for unpredictability, excitability, and explosiveness as stated by our friend the Thesaurus. In a volatile market, prices of stocks go up, and then down again, then they climb up, and fall back down again endlessly within a matter of minutes, hours, days, weeks, or months.

With a very volatile stock, there is no constant. There are no set prices. Traders are unable to accurately predict the future price of the stock. They can only get their hopes up if it starts climbing or they can slam their fists into their desks if the prices suddenly drop. Volatility can be caused by many different factors but a huge chunk of it depends on the investors themselves – their fear, their greed, and their confidence.

Benefits and Misfortunes

So, market volatility – a good or bad thing? Volatility may be seen as a problematic thing, but it can actually end up being beneficial for investors. Just think of it like this: a stock with an unchanging price equals what? Bo-ring, with no chance of making any profits. Whereas a stock with a constantly changing price makes investors’ hearts race faster in anticipation of its outcome, sort of like waiting for the winning numbers in a lottery or like the rush of adrenaline that comes as you’re watching a game in its last seconds.

Volatility symbolizes a change in the market and this can leave investors with gains or loses, depending on the final outcome. Yes, you may lose, but there is also a chance that you may gain, and you may gain a lot. Volatility goes hand in hand with risk. The more volatile a market is, the greater the risk for the investor. Basically, the more volatile the stock is, the wider its price swings are – and hence its risk. But then again, isn’t risk-taking a part of our daily lives?

Whenever risk is involved, there is always the chance of change. The chance of gains vanishes if you refuse to accept an amount of risk. Be cautious, especially when risking more than you can stand to lose. When dealing with your life’s savings, you should be aware of the balance and make sure that risk is on the same level as caution, or reason. The stock market can change due to a number of things, which are difficult to predict. All in all, analysts see stock market volatility as an indication of a rebound, according to the Commonwealth Financial Network.

Causes and Effects

Changes in the stock market are caused by a number of factors such as the foreign currency exchange rates, prices of other stocks and bonds, and financial market prices. The stock market can change from minute to minute, hour to hour, day to day, month to month – this is difficult to predict. It is greatly affected by investors and their level of confidence – this is the primary reason for volatility. If investors confidently take risks and purchase stocks, the market generally succeeds, but if they lose this confidence, it fails.

Uncertainty is another cause because if investors are unable to predict the probable future for a particular stock or for the stock market as a whole, this can lead to volatility. Uncertainty can be affected by factors such as the media, the economy, or current events. For example, if there is negative talk about a certain stock all over the news, investors would be less likely to invest in it. Likewise, if a significant global event takes place, it may cause uncertainty in the market as well.

The Volatility Index

Volatility in a stock market is measured through the Chicago Board of Options Exchange (CBOE) by the CBOE Volatility Index (VIX) or the CBOE Nasdaq Volatility Index (VXN). These indices track the price movements of stocks. Traders pay attention to markets closely and tend to buy stocks when the indices measure high because if they are low, investors believe the market will climb higher, according to Commonwealth Financial Network. However, in 2008, the stock market crashed and the VIX reached its all-time high. “Historical data has shown that wild market movements precede a change in the market’s direction. A high VIX appears just before a market rally, and a low VIX usually augurs a slide,” as stated by Commonwealth.

How do I understand volatility and how does it affect me?

When making investment decisions, always take volatility into account. The greatest factor responsible for market volatility is the investor’s level of confidence or lack thereof (fear). Past events may have a slight impact, if they have any impact at all, on stock market success, as can expectations of future events. Events may affect the market volatility to some degree, but often investors’ emotions have a more profound impact on stock market volatility. When making long-term investment decisions, let go of emotions and instead rely mostly on common sense and knowledge of the market. A volatile market can just as easily bring decent gains instead of the loses one could fear. To the savvy investor, volatility may in-fact be the opposite of the monster that many make it out to be.

NOTICE: This article was based on research of stock market information and other sources of information, found both online and in print media. Neither StockTips.com nor any of its owners, contributors, officers, directors, consultants, or employees take responsibility for the accuracy of the information contained in this article or the accuracy of the information on which this article was based. StockTips.com was not compensated by any of the companies mentioned in this article for the preparation of this material, nor were the materials approved by the companies which were mentioned.

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