Risk and Volatility
Many investors think of risk and volatility as the same thing. That is not the case. While the two terms may be similar, they mean different things in the investment world. Risks are often needed in investments to help land a big reward. Understanding these terms can help investors make better decisions regarding their trades and help them choose better times to buy and sell.
Definition of Risk
The risk is referred to as a probability of loss. The risk level needs to be assessed for each investment, no matter what it is. There are certain risks that are ideal to take because they will make the investment worth it. Other risks are not worth it to take because it is too big of a probability of loss.
Fear of losing invested money permanently is essentially why investors worry about risky choices. If there were no fear, there would never have to be a question as to which trades to make. Not all make people so fearful.
Definition of Volatility
Volatility means that there is a tendency to fluctuate regularly. It is often at a sharp interval. Prices may jump high and fall low in a short matter of time. Just because a stock is volatile, though, does not necessary mean it is risky. There are two types of volatile investments.
An investment that is more volatile has at least a 20 percent swing over one period. It can go up to a 30 percent swing. Many times, this happens multiple times in a row. There is more of a chance that it will go up into a profitable margin and earn money. While the name would suggest that it is riskier, that actually may not be the case. More volatile options are the ones investors should be considering.
Billions of dollars a year are often made with these types of investments. There is usually some money there no matter when the stocks are sold.
A less volatile investment has only slightly more than 10 percent swing during a period. It may never swing up high enough to truly make a profit. This does not make it less risky and instead seems like a risky option to get involved with.
One way to measure the relative volatility of a stock is by finding its beta. A beta is the overall volatility of return against the returns of a certain benchmark. A stock whose beta is 1.1 has been moved 110 percent each time a full move in the benchmark has been accomplished. This is all based on the price level. A .9 beta has been moved only 90 percent per a 100 percent benchmark move. These measurements help investors measure the amount of volatility and determine the best course of action.
There is an average amount of market decline every year. Within two years, the average decline is roughly 10 percent. This means that the money invested today will be worth less in just two years time. This is an example of a volatile investment. After several more years and some improvement in prices, that will not be an issue.
The immediate need for money plays a major role in investors determining how and when to buy and sell their trades. Investors who know they need their money immediately are more willing to take it out quickly, even if they have to experience a loss. Those that know there is no immediate need for the money can leave it longer and allow it to reach a gaining point.
There is always a risk assessment needed before a stock purchase can be made. Stocks are a way to take ownership of a company and receive a say in day to day operations. Many companies are not worth taking a stake in, while some are. Investors need to determine which are best to work with. Profitable companies that have been around for some time often prove more beneficial in the long run. They are known to bring in earnings and are sure to continue down the same path.
It is also important to note that certain risks are worth taking. A new company may do well for a while, so it could be ideal to purchase a stock with them quickly and sell it before their time is up. Knowing when to do so is the risky part. Knowing the right time to buy and sell stocks and keep some earnings in the process is what makes the whole process so difficult to decide.
Even if the risk is high, it may be worth it if the company pays its shareholders dividends. It could help earn a small income for the time being. Only some offer these dividends, and some pay out much more than others. It is wise to research which ones pay and which are not worth the effort.
The high risk and difficulty understanding volatility are why many investors turn to brokers. Rather than attempt to make the trades themselves, they discuss their options with a full-service broker who works with a trained analyst. These analysts have expertise in the field and know which risks are worth getting into. They will provide detailed information to the broker, who provides the information to the investor, and discusses all the wisest options to choose from.
This is why it also a smart idea to invest online. Online trading shows many of the market trends, price charts, and costs. It can help newcomers better see for themselves why an investment is or is not risky. The charts help people see for themselves what the best option is.
The volatility, as well as the risk, should be assessed for every case. Both are different aspects that need to be measured to make a proper determination. The amount of time an investment sites also plays a major role in determining its volatility level and riskiness.