Stock market volatility is a measure of how often prices change for a specific asset. It is an important indicator of investor fear, and as a result it tends to rise during times of high uncertainty. However, it is important to remember that it doesn’t tell you the direction of price changes – only how big those changes are.
There is a lot of math that goes into calculating volatility. It’s not an easy number to understand, but it can be helpful for investors when they’re making decisions. For example, the CBOE Volatility Index (VIX) is a popular indicator of expected market volatility. It is calculated by multiplying the standard deviation of a stock’s price over 30 days by 16 to get its annualized percentage. This helps to normalize the variance and remove some of its randomness.
Volatility is influenced by a variety of factors, including inflation trends, evolving monetary policy, industry changes and national and international events. Historically, stock prices have shown volatile movements and jumps during periods of significant macro-oriented uncertainty shocks, such as the COVID-19 pandemic and the Great Recession.
While there’s no way to know when market downturns will occur, you can take steps to help prepare yourself for them. Make sure you pay your credit cards on time, maintain an emergency fund and keep up with other financial objectives like saving for a vacation or retirement. And, when you’re ready to make a long-term investment plan, work with a trusted financial advisor who takes your personal goals, risk tolerance and tax situation into consideration.