Market volatility is the rate at which the price of a security or asset ascends or descends over a given period. It is usually calculated by estimating the standard deviation of the asset’s annualized returns over the specified period.
Market volatility occurs when there are frequent fluctuations in the prices of assets, especially in a short period. Analyzing price fluctuations of financial instruments over a period helps predict volatilities to some extent.
While volatility predominantly depends on the factors of demand and supply, when assets, securities, or financial instruments are high in demand and low in supply, price hikes are common.
Standard deviation is generally used to measure price fluctuations; investors rely on the VIX index as a market volatility indicator. The standard deviation method is usually used to calculate the volatility.
The deviation value shows the range within which the underlying asset price may increase or decrease. The market is said to be more volatile when price movements are larger and more frequent.
The CBOE Volatility Index (VIX) is the primary tool for measuring market volatility. It provides investors an insight into how professionals in the stock market think about the prevailing conditions. This especially helps short-term traders to know where the market is headed and make use of the situation.
The market volatility chart can be unpredictable, and the reasons that cause changes in the market can be difficult to predict. However, a few pointers can induce market changes: Market cycles, Monetary policy changes, Geopolitical influences, Market sentiments, Company ratings, etc.
Furthermore, factors such as seasonality, cyclicality, market speculation, and unexpected events can affect the market’s uncertainty.
Seasonality: Regular seasonal changes are more predictable since they are recurring, but share prices can still exhibit significant movements around essential dates (e.g., retail companies and holiday sales reports).
Cyclicality: During different stages of the economic cycle, certain companies are more vulnerable to price movements (e.g., housing is prone to steep declines during recessions due to the exposure to new construction).
Speculation-Driven: When a company’s value primarily stems from future earnings rather than existing earnings, its valuation is forward-looking – and changes in the prevailing market sentiment regarding future performance can cause significant price fluctuations (e.g., cryptocurrencies).
Unexpected Events: Concerns about the future macro-outlook aggravate the volatility of assets, often triggered by fear-inducing events such as a geopolitical conflict and sanctions, particularly for commodities (e.g., oil and the Russia/Ukraine conflict).
To the extent that stock returns are related to market volatility through their respective link to stock liquidity, these regulatory changes are also expected to increase the sensitivity of stock returns to market volatility.
Market returns are never free and never will be. They demand you pay the price, like any other product, and you’re not forced to pay this fee. The volatility/uncertainty fee the price of returns- is the cost of admission to get returns greater than low-fee parks like cash and bonds.
The trick is to convince yourself that the market’s fee is worth it. That’s the only way to properly deal with volatility and uncertainty, not just dealing with it, but realizing that it’s an admission fee worth paying.
It’s not unusual to be concerned by periods of market volatility. It can be scary to see large or even small losses on paper. But in the end, you must remember that market volatility is a typical part of investing, and the companies you invest in will respond to a crisis.
Companies are very resilient; they do a fantastic job of working through whatever situation arises. While it’s tempting to give in to that fear, it is advised that people should stay calm. Those who are patient and disciplined do very well in the stock market.
