Stock market volatility is a measure of the fluctuations in an asset’s price. A higher volatility indicates that prices are more likely to move dramatically in either direction over a short period of time. A lower volatility indicates that prices are more steady.
A key metric used to gauge a market’s current level of volatility is the VIX. Known as the “fear index”, a high VIX reading signals concern or uncertainty, while a low reading suggests relative calm. Another important measurement is a stock’s beta, which measures its relative volatility to the market by comparing its prices to those of a benchmark index such as the S&P 500. A stock with a beta of 1 would be expected to follow the index, meaning that for every 100-point move in the index, the stock’s price moves the same amount. A beta of less than 1 means that the stock is less volatile than the index.
Volatility is also an important factor in the pricing of options, and forms a component of the Black-Scholes option-pricing formula. When calculating volatility, all differences (negative and positive) are squared to create the dispersion. The resulting number does not necessarily indicate the direction of these changes, however; it is possible that a stock with greater volatility could experience larger swings in price than one with lesser volatility.
About the Author
