If you want to invest in stocks, you first need to understand how the stock market works. For the investor it is particularly important to know what causes the quotes to vary. After all, the stock market prices fluctuate greatly, even for a second they may go up or down. Volatility is a probability of stock prices’ change.
So what affects the price, causing them to be unstable? There are many factors that can affect the movement of the stock price. First of all, the economic and financial information. Last news or data that have become available to the public, may provoke a sharp upward or downward price movement.
The way in which the public or the market will react to the dissemination of information has an impact on prices. Much will depend on the interpretation of the market. If the majority of participants feel that the information will have a positive impact on the company's profit, the prices may go up.
The rule of supply and demand is another factor to consider. Shares that are traded in small quantities are particularly prone to volatility. Small volumes of shares are generally less liquid compared to a large market share. It’s beneficial to own popular asset because shareholders can demand a higher price for their goods.
Finally, there is always an uncertainty in trade. Share’s price movements are unpredictable. You can never say with 100% certainty will they go up, down or stay the same.
After the learning the key factors of volatility you should learn to measure it. There are two methods: historical and implied. Historical volatility is calculated by studying past price changes. As a rule, traders monitor the price in the past thirty days, although there may be employed various other time periods.
Implied volatility can be measured if the prices are already known. That is, the method uses actual prices as its foundation. If the price goes up, it is very likely indicates high volatility and vice versa.