When stock prices jump up and down a lot, it may feel stressful, even when you’re invested in a well-diversified portfolio. The good news is that stocks usually bounce back after a correction or crash. But it’s important to understand the drivers of volatility and keep them in perspective.
A security’s volatility tells investors how risky or unpredictable it is. Volatility is based on the range of returns over time, and it’s measured by the standard deviation of those returns. A higher volatility indicates a riskier asset, while a lower one is less volatile.
The CBOE Volatility Index, commonly known as the VIX or “fear index,” is an indicator of expected volatility for the entire market. It’s a statistic derived from the price of options, which are financial instruments traders use to speculate on the direction of stocks.
Investors can also look at historical and implied volatility to evaluate individual stocks. Historical volatility is a metric based on an asset’s past performance. Implied volatility is a prediction of how volatile an asset will be in the future, based on investor expectations.
Researchers have looked at a wide variety of potential causes of stock market volatility. They’ve found that geopolitical events, economic uncertainty and changes in investor sentiment can all drive up or down markets. However, it’s often difficult to pin down specific causes with any granularity. Rising government bond yields and the likelihood of fewer Fed rate cuts this year may have added to recent volatility, for example.
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