Understanding 5 Different Types of Volatility

Price Volatility

Price volatility happens if there is a strong swing in demand and supply. There are three main reasons for this. The first reason is the seasonality.

For instance, you will find hotel room prices rise during winter since people like to get away from the snow. On the other hand, the price significantly drops during the summer since people like to travel nearby.

The second reason is the weather. An example of this is agricultural products. The last factor is emotions. Most of the time, if traders are trading with their emotions, they will trigger volatility.

Stock Volatility

Some stocks are highly volatile by nature. These stocks are more risky for your investment portfolio. Consequently, investors try their best to get higher profit from these stocks. Thus, this stock should show consistent increasing prices or pay high dividends.

These days investors have had a tool to measure stock volatility. The name of this tool is beta.

Historical Volatility

Historical volatility reflects the amount of volatility of a stock in the past 12 months. The stock is more volatile and riskier if the price is more varied in the past year. These stocks become less attractive to investors.

To get profit, investors have to hold this stock until the price return. Traders can know the low and high point by studying the charts. Once the stocks at a high point, an investor can sell it to get profit. That is timing the market.

Market Volatility

It is the velocity of the changes of any asset prices, including forex, stock, and commodities. This volatility happens due to a lot of uncertainties. Bearish traders or short sellers usually drive the price down after bad news. On the other hand, bullish traders bid up prices after a good news appear.

Implied Volatility

It refers to the level of volatility that options traders think the stocks may have in the future.traders can know this type of volatility from the different future option prices. Rising option prices show increasing volatility, and vice versa.

During the volatile moment of the stock price, traders should buy the stock and wait for the stock price increase.