Stock Volatility

(4 of 6)

Stock Volatility

Stock traders generally want to buy stocks when their values are low and sell when their values are high. The distinguishing characteristic of stocks is their potential to change in value in ways that can be hard to predict.

Things To Know

  • Volatile stocks carry much risk, but they also carry the potential for high returns.

The ups and downs of volatility

A stock that is likely to have great or fast changes in its value is called volatile. Volatility gives stocks the capacity to have high returns if values rise, but it can also make stocks a risky investment if you can’t sell them before they fall. Volatility is a major key to investment strategy.

Blue chip stocks are less volatile

Blue chip stocks, a term for the stocks of older, well-established companies with strong track records, tend to have lower volatility. They are more likely to pay dividends and may tend to grow steadily, if slowly, in value. Because of their generally low volatility, you often have to hold these stocks a longer time to enjoy large value gains.

Who buys volatile stocks?

Highly volatile stocks—for instance, those of new companies in hot industries—have appeal to those interested in sophisticated short-term trading strategies. The goal of such strategies is to watch for stocks can be bought at low prices and sold relatively soon when the values potentially grow. They have no real way to be sure this will happen, however, so while volatile stocks have the potential for high and fast returns, they also present a greater risk of losing your money. This risk includes the loss of principal, the amount of money you invested.