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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Market volatility refers to the degree to which the price of a security or the index that it tracks changes over a period of time. It’s important for investors and traders to understand market volatility in order to make informed decisions about their investments. Investors who prefer to buy and hold a stock, rather than trade, may want to avoid volatile stocks, as volatility makes it harder to maintain the value of the investment. But investors may also want to take advantage of volatility by . Here’s what volatility is, how it’s measured and how it can affect investors.

How market volatility is measured

There are two main ways to measure actual market volatility, standard deviation and beta: Standard deviation is a statistical measure that shows how much a price changes over a time period relative to the asset’s average change in price. Beta is a measure of volatility that compares a stock’s volatility against a benchmark, such as the S&P 500 Index. is a measure of how volatile a stock is relative to the overall market. Market volatility is defined by the standard deviation of the returns. The returns are calculated over a given period of time, such as a month or a year. The standard deviation measures how different a stock’s individual returns are compared to its average return over that specific period. A stock’s standard deviation would typically be reported in percentage terms, giving an absolute level of volatility for the asset. In contrast, beta provides a relative measure of volatility, comparing a stock or other assets against the . So the results provide an indication of movement in terms of the base index: A stock with a beta of 1 will move the same amount as the overall market. A stock with a beta of 2 will have price moves twice as big as the market as a whole. A stock with a beta of less than 1 will be less volatile than the index as a whole. Alternatively, a negative beta indicates that the asset moves in the opposite direction of the market. However, both standard deviation and beta are measures of volatility, but not the risk of an investment’s cash flows or a company’s fundamental business risk. In addition, some market watchers use the , popularly known as the “fear index,” as an indicator of overall market volatility, though it’s tracking a different kind of volatility. The VIX measures the expected fluctuation for the S&P 500 Index, based on the implied volatility of near-term S&P 500 index options. The VIX is calculated from an average of the cost of those options, and its calculation is one of the most closely watched indicators to predict future market volatility. The VIX is based on a weighted average of the option prices of the broad S&P 500 index, which is based on the average of the stock prices of the approximately 500 members of the index.

How market volatility affects investors

Market volatility can have a big impact on investors. For some, the uncertainty and rapid change in market conditions can be unsettling. It’s not unusual for investors to feel anxious about their investment or frustrated about recent losses, leading to decisions that can hurt your long-term returns. Anxiety: You may feel like the market is against you. The stock market has historically risen over time, and you may feel like you’re losing out to the market’s overall upward trajectory while you’re trying to build your wealth over time. Increased tax hit: If volatility has you selling positions with a capital gain, it could trigger , costing you some of your profit. Increased commissions and costs: If you’re trading in and out of the market, you may run up higher costs, especially if you’re buying . Short-term decisions: To cut losses, many investors sell due to volatility, meaning they’ll be unable to earn the market’s returns. They may be unable to buy back into the market at a lower price, meaning they may be “selling low and buying high.” But there are ways to help get through a volatile period, such as managing your temperament: Stay in it to win it: The worst way to get through a market downturn is to panic and sell. And if you sell, you’re unlikely to buy stocks at a good price. You should always have equities in your portfolio, and you can reallocate your finances if you need to. Keep a diversified portfolio: A , with both stocks and bonds, tends to be less volatile than the stock market as a whole. So you may be able to sleep easier. Take time to breathe: Don’t make rash decisions when the stock market is volatile. Stay even-tempered during the good times: Don’t get overly excited about the market’s gains. A market downturn means , while a market surge means it’s a great time to resist the urge to buy. SHARE: This article was generated using automation technology and thoroughly edited and fact-checked by an editor on our editorial staff. Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.

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