Volatility — the ups and downs of investment stocks
What does volatility mean? - The definition
volatility describes the intensity and frequency of Price fluctuations on financial markets and serves as a measure of investment risk. The term is derived from the Latin “volatilis”, which means “fleeting,” and reflects the mobility of prices. The volatility of an underlying asset — such as a stock, currency, or an index — shows how much its price fluctuates over a specific period of time. In general, the following applies: The higher the volatility, the greater the potential return opportunities, but also the risk.
How is volatility calculated?
To determine the volatility, you calculate the Standard deviation of price returns in a specific period of time. All share prices of the investment within this period are taken into account. A higher standard deviation indicates larger price fluctuations and thus higher volatility, which is often a sign of an uneasy market.
A simple calculation example would be to take a series of daily exchange rates for a share and determine its deviation from the average value. The result shows how much the values fluctuate around the average and thus provides information about the risk.
Difference between high and low volatility
Volatility helps investors better assess risks and opportunities:
- High volatility often means large price fluctuations in a short period of time. This can be attractive for risk-taking investors who hope for short-term gains, but has a higher potential for loss.
- Low volatility stands for more stable development. Investments with a low fluctuation range are considered safer, but often offer fewer opportunities for above-average profits.
Historical vs. implied volatility
There are two types of volatility:
- Historical volatility: This variant is based on past price movements and shows how volatile a security was in the past. It therefore offers a review.
- Implied volatility: This is where future volatility is estimated, often based on current market supply and demand. Implied volatility is generally used in options to predict expected price fluctuations and to calculate prices for derivatives.
How do you use volatility for investments?
Investors can use volatility for short term profit opportunities use or avoid them to keep their portfolio stable. Higher volatility can promote profits in promising market phases, but is a Investment plan with diversification recommended to mitigate risks. Those who prefer stability often vote ETFs or realty, which secure the portfolio through broad risk diversification and lower volatility. Real estate in Switzerland in particular is extremely unstable.
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