Market volatility is a pretty simple concept but it's one that every single investor should understand. Unfortunately, it is discussed around a lot without much understanding.
What is volatility?
Volatility means how much the overall market or any financial instruments (such as stocks, bonds, options or mutual funds, etc) is moving up or down compared to the normal. Volatility means swings. It simply refers to the frequency and severity of the price movement - up and down.
How is it measured?
But what is normal? Volatility is measured against a standard measure of the overall market movement. So if an investment is more volatile, it means it moves rapidly and severely compared to the market.
Although there are many mathematical calculations available to measure volatility, it is commonly measured using an indicator called 'Beta'. Beta measures the sensitivity of security's price movement, compared to the market. If the beta of a security is > 1, the security's price is theoretically more volatile than the market (such as S&P500). If the beta of a stock is 2 then its price movement will be twice as rapid and severe compared to the market. If the beta of a stock is -2, its volatility would be in the opposite direction of the market.
How to take advantage of volatile markets?
Many investors think of the volatile markets as risker events. However, at US Investment Advisor, we like volatility. During the volatile markets, we may have opportunities to buy wonderful companies that otherwise would never be available to us at the right or discounted price. Few investors use a combination of investments with a high, low and negative beta values to diversify the portfolio as a hedge against market volatility. Getting into stocks with high volatility at the right time may provide high profits.
We need volatility in order to be a successful investor. However, the key is to find the right investment opportunity, which is significantly undervalued and buying it at the right time. And finding that winning investment depends on your investment strategy.
To learn more about our services and how we can help your investment needs, visit us at US Investment Advisor.
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