One measure frequently used to to describe behavior of a stock is volatility. Volatility indicates the dispersion of returns for a particular security, usually in relation to returns from the same security or a broader market index. In simpler terms, volatility expresses how much risk or uncertainty is associated with a stock’s value. The higher volatility is, the more spread out the range of potential values. Volatility can occur in either direction: a sharp rise is considered volatile as well as a sharp fall. Securities with low volatility rise or fall slowly over time, generally making them more dependable.
An important type of volatility measure is a stock’s beta. The beta compares a security’s overall volatility to that of a common index such as the S&P 500. A stock whose volatility matches that of the index has a beta of 1. A beta higher than 1 means that the stock is more volatile than the index. Specifically, a beta value of 1.15 means that the stock has moved 115% for every 100% moved in the benchmark index. A beta value lower than 1 means that the stock is historically less volatile than the index.
Investors have many good reasons to care about volatility, anxiety among them. Volatility can cause cash flow problems further down the line, and cause a person’s retirement portfolio to be unreliable. Volatility can also affect pricing of options and position sizing in a portfolio. Today’s market also features financial products such as variance swaps that allow a person to speculate on volatility.
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