Volatility

The volatility of a stock refers to the fluctuations in the stock’s price over a period of time. When someone refers to a stock as highly volatile, they generally mean that the price of that stock has gone up and down wildly within a relatively short period of time. Three factors that produce volatility are seasonality (of goods and services), emotion (of traders & investors), and weather (that can affect supply & demand of commodities).

It is important to note that volatility does not necessarily equate to risk. A common risk investors take is being forced to sell a stock at a loss or when the price is down, (often because they need their money at a certain time). Therefore, a highly volatile stock may be risky for investors with a short time horizon. However, the same stock may be considered a prudent investment for investors with a longer time horizon.

For investors with long time horizons (more time in the market), volatility can often mean opportunity. Because the price of these stocks often fluctuate, nimble investors may be able to buy low and sell high, realizing a higher return than if they had bought a stock with little to no historical volatility. In addition, some companies with volatile stocks often pay high dividends in order to incentivize investment.