When the market experiences high volatility, it means that there’s a big chance of price changes happening quickly, and potentially dramatically in either direction. It can also mean that the average return on a given investment will be lower than usual.
A number of different factors can lead to volatility in the stock market, and it’s important for investors to understand those factors so they can make informed decisions about risk and return.
Economic Factors: Macroeconomic issues like GDP growth, inflation and unemployment can have an impact on investor confidence and lead to price fluctuations in the stock market. Company-Specific News: Earnings reports, mergers and acquisitions, product launches, management changes and legal or regulatory events can trigger volatility in some stocks.
Geopolitical Events: Political instability, trade disputes, wars and terrorist attacks can cause financial market uncertainty and result in stock price volatility.
Volatility is measured as the standard deviation of a security or index’s returns over a specific time period, and it can be reported daily, weekly, monthly, or annually. You can also look at implied volatility, which is a calculation of expected volatility in the options markets.
A higher implied volatility suggests traders expect the stock to have a bigger move in the future, and a lower implied volatility implies less volatility. High levels of volatility can lead to panic selling, which can create a real problem for people who have invested long term in stocks. It’s best to stay calm and stick with a regular investing strategy that will help you build wealth over the long term regardless of what the market does in the short term.