Simple Does It: Price Volatility

Simple Does It: Price Volatility

If any of you out there has had a toddler or knows one fairly well, then you already have the means to understand the term "volatility." One minute, your toddler is happily making sweet potato art on his high chair tray while the next minute finds him screaming because no one will give him a steak knife.

Volatility, then, is when something varies greatly over a given period of time. Though pages and pages could be written about this phenomenon and kids, the same concept also applies to the investing and financial world. Today, we take a closer-yet-simple look at price volatility.

Definition, Please

If volatility is when something varies, then price volatility must mean when the price of something goes through fluctuations. That something could easily translate into stocks and investments; anyone watching the market lately will not question the fact that stocks can be volatile in that their prices are like that Katy Perry hit in that they're up, then they're down, hot and cold, yes and get the drift.

What It Means to Investors

So, other than the ability to affect prices of stocks over a said period of time, what could price volatility mean to an investor? Here are three common things this concept affects in the investing world:

  • The uncertainty can cause stress. Looking back to our example of a volatile, food-smearing Junior, volatility of the toddler variety can cause great stress on the parents. Likewise, fluctuating and uncertain prices of stocks can also have an emotional, nail-biting effect on investors.
  • It has the potential to affect retirement. If there is a great volatility, the end retirement savings portfolio result could widely vary, or the withdrawals made during retirement on returns that are volatile can have an impact on the overall value of said retirement portfolio.
  • But it doesn't have to be all bad. Some good can come out of volatile prices. It can give investors a chance to buy a stock at low prices and sell when the price goes up (really, isn't that the whole point of investing in a nutshell; to make money?).

Whether you're a beginning or seasoned investor, or if you're just looking to get more info on the world of investing, price volatility is a term worth knowing. Keep watching MomVesting for more of our "Simple Does It" series in which we take the mystery out of investing terminology.

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Financial Definitions - Glossary for Understanding Finances wrote:

Thu, 01/19/2012 - 21:47 Comment #: 1

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