Understanding Stock Volatility – and Why it Can be Good for Traders

Understanding Stock Volatility - and Why it Can be Good for Traders main

It may be logical to surmise that stock volatility is a bad thing for steady traders – those people that enjoy dabbling in stocks and shares but are not prone to outrageous gambles or looking for a trading rollercoaster ride.

But as any experienced trader will tell you, a volatile stock isn’t just confined to something like cryptocurrency – and it may be something that helps you make money in the long run.

What is a Volatile Stock?

Put simply, it’s a reflection of a wildly fluctuating stock price. A stable stock (for example, The Walt Disney Company) will have a relatively safe price that rises and falls fairly gently in tandem with world events and more local industry factors, whereas a volatile stock (such as various biotech industries in the wake of the coronavirus pandemic) are much more vulnerable to shifting world events and can rise or fall exponentially, putting money at risk, or even rewarding traders with a spike.

Of course, all stocks are vulnerable to market forces – and not even the giants of international commerce are immune to stock fluctuation, but a volatile stock is by its nature a riskier investment.

Is Safe Trading a Wise Investment?

Most everyday traders play it as safe as possible (‘risk tolerance’) and stick with stocks that are unlikely to lose much, if any, value. While this might be a good strategy long term (if the trader has the patience), it’s not usually the best strategy for high net profits over a short period.

Risk-reward is the key to stock management – and goodness knows how many books have been written on the subject – but volatile stocks shouldn’t just be ignored by part time traders. Indeed, traders are increasingly looking at CFD trading, where they have a choice between long-term holding investments and quick day trading strategies.

Let’s look at volatile stocks in more detail.

Understanding Stock Volatility - and Why it Can be Good for Traders markets

Why Volatile Stocks Could Work for You

The key to good trading is simple: sell at the right time, but also buy at the right time. If you’re tracking a volatile stock and you think it has bottomed out and looking good for a rise, then why wouldn’t you buy it? Well, plummeting stocks don’t always recover and freefalling stocks can always fall further than you think.

Having said that, some traders embrace volatility and seek to make profit from the price swings. It is, of course, a risky game and professional traders use all sorts of hedging tactics to protect against volatility.

Where is the Middle Ground?

Of course, stocks and shares are not an either/or pursuit. Some traders prefer to spread their investments across stocks of all types. This, naturally, includes a middle ground. The CBOE Volatility Index measures the average volatility of a stock over a three month period, with a 30 rating accepted as high volatility and anything under 20 relatively low volatility.

Those stocks in the middle can be considered of ‘average volatility’ and there is a market for those type of shares too.

Is Volatility Good?

Like all aspects of trading, volatility can be good if you trade on the right stock – but it can also be a road to ruin if you climb on board the wrong ship.

Like any investment, do your research, buy only what you can afford and, if you need to, remember to cut your losses.

But there’s no doubt about it – a volatile stock can be a bumpy ride, but it can also be a very good ride for traders.


Leave a reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.