Stock Volatility

If you've seen the jagged lines on charts tracking stock prices, you know that prices fluctuate throughout the day, week, month, and year, as demand goes up and down in the markets. You'll see short-term fluctuations as the stock's price moves within a certain price range, and longer-term trends over months and years, in which that short-term price range itself moves up or down. The size and frequency of these short-term fluctuations are known as the stock's volatility.

If a stock has a relatively large price range over a short time period, it is considered highly volatile and may expose you to increased risk of loss, especially if you sell for any reason when the price is down. Though there are exceptions, growth stocks tend to be more volatile than value stocks.

In contrast, if the range of prices is relatively narrow over a short time period, a stock is considered less volatile and normally exposes you to less investment risk. But reduced risk also means reduced potential for substantial short-term return since the stock price is unlikely to increase very much in that time frame.

Stocks may become more or less volatile over time. One example might be a newer stock that had formerly seen big price swings, but becomes less volatile as the company grows and establishes a track record. Another example might be a stock with a traditionally stable price that becomes extremely volatile following unfavorable or favorable news reports, which trigger a rash of buying and selling.