What is Market Volatility?

As long as there has been a stock market, there has been market volatility. But you might be worried about it too much. 

You don’t have to know very much about stock exchanges to understand that market volatility is part of the landscape. Some volatility, like recessions, crashes, and depressions, is so bad that they end up in the history books. However, most come and go with little fanfare outside of a few news stories here and there. 

As far as an actual definition, market volatility is the measure of how greatly stock prices vary over a period of time. And the VIX, properly known as the Chicago Board Options Exchange (CBOE) Volatility Index, measures market expectations of near-term volatility based on option prices among S&P 500 stocks.

Like many things, however, the severity of market volatility depends partially on your perspective. You can have volatility in individual stocks or across the entire market. Time also plays a role in overall volatility. 

What’s high and what’s low depends on the period you consider. For example, the ten-year period beginning at the start of the 2008/2009 recession saw the Dow Jones Industrial Average climb about 18,000 points. After the initial rebound following the recession, the market nosed down in the last half of 2011, and again in 2015 and 2016. And 2018 brought some huge market swings, as well. 

However, even with the ups and downs, every time in the last decade that the investor fear gauge (VIX) has made a quantum leap, and stocks have plummeted for weeks and sometimes months, it took less than a year for them to fully recover.

So while you should be leery of sharp declines, you should try to avoid stressing over minor dips. Remember, volatile stocks have the potential to bring you impressive profits.

If you’re curious about volatility, you might find our FREE report, Technical Analysis of Stocks, to be a robust addition to your knowledge base.