Volatility is a term used in investment that often refers to the fall in price only; however, it can be associated with a sudden rise as well. According to The Economic Times, market volatility refers to the sudden rise and fall in the security for a given set of returns.
The ratio as to which the prices fall or rise gives crucial information to investors suggesting if the market is worth investing in or not. If there’s a frequent rise and fall in the stock market, then it predicts that the market is volatile at the moment and the risk of investing is higher.
How to Calculate Market Volatility?
Market volatility can be calculated as standard deviation or variance over a period of time. The variance can go either high or low, but the value should be more than 1% to count the market as volatile. The higher the price, the higher will be the volatility and vice versa.
Previously, in historical times, the market volatility was calculated by going over the past prices. The measure of volatility shows the amount of risk that helps investors make the right decision or prepare themselves to overcome the potential loss. Calculating market volatility is crucial for investors and can be caused due to many reasons.
Reasons behind Market Volatility
Here are a few reasons that make the market volatile and increases or decrease the risk for investment.
1. Political and Economic Condition of the Country
From the economic condition to the government’s regulations, everything influences the investor’s share prices in the stock market. A single speech, a new reform, a change in policy, etc., can cause investors to invest more or less in the market. In addition to this, the economic condition of the country, such as GDP calculations, inflation data, and others, also make the market volatile and affect investors’ decisions to invest in the market.
2. Unwanted Events in an Industry or Sector
A sudden change in one industry or sector can also make the market volatile. For instance, a weather event can influence oil production, eventually increasing oil prices. Moreover, the government can also introduce subsidies on oil prices which generally leads oil companies to increase their prices. All these small measures in an industry affect the stock market and can make the stock prices fall or rise suddenly.
3. The Performance of the Company
In addition to government and industry, the company’s performance can also make its stock market volatile. For instance, a good earnings report might cause the stock prices to go higher, and news about data breaches, bad employee behavior, etc., can cause the stock price to plummet.
Francisco Faraco is a CFA charterholder with plenty of experience working in the field. Francisco Jose Faraco is currently working as a Teaching Assistant in the Financial Mathematics program at the University of Chicago.
