Stock Market Volatility

Stock market volatility measures the amount of uncertainty or risk in the markets. A higher level of volatility means prices swing more widely and a lower level of volatility implies less uncertainty or risk.

Investors can use volatility to gauge how much risk they’re taking on when making investments, or as a tool to help manage their investing habits or strategies. Understanding how to measure volatility can give investors a better picture of whether market changes are typical or a sign of underlying problems.

A common measure of volatility is called the standard deviation. It’s calculated by dividing the average magnitude of market index daily changes by the average number of those changes. It’s important to note that this calculation assumes a normal distribution, which isn’t always the case.

The CBOE Volatility Index, or “fear index,” is another popular indicator of volatility. It estimates expected volatility over the next 30 days based on options pricing tied to the S&P 500. This forward-looking volatility, also called implied volatility, can provide a useful read on the mood of investors.

Regardless of the cause, sudden stock market volatility can be unsettling. But it doesn’t necessarily mean that stocks are in trouble or that the economy is deteriorating, and that’s why it’s important to maintain perspective. Keeping your eyes on the long-term can help reduce anxiety and the temptation to make decisions that could hurt your portfolio’s overall performance. Talk with your financial advisor about diversification, and consider dollar-cost averaging, which can reduce the impact of short-term price swings.