Glossary
Volatility
How much and how quickly a price moves up and down, usually measured as the annualized standard deviation of returns, historical or implied.
On this page
Volatility describes how widely and rapidly a price fluctuates. A stock that moves 3% on a typical day is more volatile than one that moves 0.5%. It is the most common way to quantify an investment's risk, it sets the price of options, and it determines how much room a stop needs and how large a position can safely be.
How it is measured
Historical (realized) volatility is the standard deviation of past returns, usually daily, annualized by multiplying by the square root of the number of trading days in a year, about 252. Implied volatility is the forward-looking figure backed out of option prices: the volatility the market is paying for.
Other gauges include the average true range, which measures typical bar size in dollars, beta, which measures volatility relative to the market, and the VIX for the S&P 500's implied volatility.
Common misreadings
Volatility counts moves in both directions, so it is not the same as risk of loss: a stock that rises in big jumps is "volatile" too. It also clusters. Calm periods tend to follow calm periods and turbulent ones follow turbulent ones, which is why a quiet stretch can end abruptly. For long-term investors, volatility is the price of admission for higher expected returns; for traders using leverage or tight stops, it can be the difference between a plan surviving and failing.