The stock market has a lot of ups and downs or volatility, just like a person who has a lot of mood swings. And volatility means more risks for the participants involved in it.
The stock market can be extremely volatile at times, especially during periods of economic upheaval and uncertainty, trade disputes, and disastrous events.
Nonetheless, it is still true that the right amount of volatility in the market adds spice to the daily battle of investors and traders with it.
While many investors tend to be risk averse, it is still important to be aware of what exactly is volatility and what it is to the market. So here’s a breakdown of stock market volatility.
What is the stock market?
Generally speaking, the stock market is the congregation of markets and exchanges in which you can issue and trade shares and equities, among other sorts of securities. You can do such transactions through regulated and standardized exchanges or via over-the-counter markets.
This market enables companies to tap a seemingly inexhaustible source of capital in the form of stocks. When investors buy shares of a publicly traded company, they become entitled to a slice of ownership of that company which issued the stock.
Because of these reasons, the stock market has become one of the most vital components that contribute to the structure of the free-market economy.
Kinds of Stocks
In order to understand how stocks work and how they differ, it’s important to know what kind of stocks can be bought in the stock market.
When people talk about stocks, they’re almost always referring to common stocks. As the name suggests, it’s the most common stock bought and sold in the stock market. It gives the holder a part of the ownership of the company and therefore a part of the income gained by the company. It also gives the holder voting rights, among other benefits, in the company.
Meanwhile, preferred stocks do not give any voting rights, but give the investor regular income in the form of dividends issued by the company. Preferred stockholders usually get paid first before common stockholders, even in the event that the company goes out of business.
What is Volatility?
Volatility is a word used to describe the amount of risk or uncertainty regarding the size of a security’s value. Different kind of stocks from different companies have varying levels of volatility.
In general, higher volatility means higher risk, and vice versa. As indicated above, volatility is some sort of a necessary evil since it makes market move, and often helps bolster liquidity. Also, higher risk generally mean higher potential rewards.
What, then, is stock market volatility?
Stock market volatility refers to the amount of fluctuation in value that the stock market experiences. Needless to say, higher stock market volatility means higher risk.
When the stock market becomes increasingly volatile, it usually means we’re near a market top or a market bottom, largely due to heightened uncertainty.
There are bullish traders who bid up prices during days of optimism. Then there are also bearish traders who push down prices in times bad trading days.