Volatility of a stock illustrate movement of market that is not stable as unpredictable way, that stocks couldn’t able determine which side it triggers.
Which that volatility is had two types one is high and another one would be low based on market movement of past performance and such market volatility would be predicted in distinct manner, lets see those how the volatility measured in the next heading.
When the market shows low trading range from time to time which means from previous closing price to the current traded price. It demonstrate that stock is low volatility now.
Simultaneously when the same stock would shows the high range of moves each day from time to time then that security consider in high volatility category. In more simple manner the volatility of the stocks means unpredictable and unstable movement in the certain stock.
Trading the high volatility stocks requires higher risk than low volatility, at the same time high volatile also had the huge loss in most of time, it would be in normal stock trading frame or stock option.
Therefore volatility of a stock play major role in the stock market to determine the trading decision each day. Next lets dive into know how the volatility are measured on the stocks in very simplest manner and example with strong reason behind every calculation.
2. Calculation for volatility of a stock
To measure the volatility of any stock take the past previous days closed price of market and divide with number of days that need to find the volatility of the chosen stock, that shows average move over the past period.
Then secondly use those average price to Subtract with previous days closed price to know which days does the market of that stock lack the growth or not.
Thirdly take all previous days growth and lacked days that Calculate from second step and taks squares for the number and add together, then divide with number of days that volatility need to be calculated that shows what is the average gain or loss in stock movement over the course of period.
Finally take those third value and find the square root for arrived value to got the standard deviations(SD). That SD would be considered and shows the number as how volatile such stock would be. To have more grip on the understanding of measurement on volatility of stocks, lets jump into one clear example.
3. Example for measuring the volatility of a stock
Assume over the past 6 days that price of the stock closed at different kind of point. Say
Day 1: $12
Day 2: $14
Day 3: $10
Day 4: $13
Day 5: $16
Day 6: $9
Next lets add all this 6 days range to arrive in average growth of particular stock.
12+14+10+13+16+9= 74.
Number of days that we want to calculate the volatility would be 6 days.
74÷6 = 12.3
In this example 12.3 is an average growth of an 6 previous days of a stock. Next secondly to find which day the stock really grown and which days is not subtract the 12.3 with 6 days previous day Price.
Day 1: 12.3 – $12 = 0.3
Day 2: 12.3 – $14 = -1.7
Day 3: 12.3 – $10 = 2.3
Day 4: 12.3 – $13 = -0.7
Day 5: 12.3 – $16 = -3.7
Day 6: 12.3 – $9 = 3.3
This shows over the course of 6 days how much growth its grown and losses. Then to find the average move on the changes days of market, take a square for all six and divided with 6 from adding the total change. That shows how much each day certain changes equal to number of days.
Day 1: 0.3 squared = 0.09
Day 2: -1.7 squared = 2.89
Day 3: 2.3 squared = 5.29
Day 4: -0.7 squared = 0.49
Day 5: -3.7 squared = 13.69
Day 6: 3.3 squared = 10.89
0.09+2.89+5.29+0.49+13.69+10.89 = 33.4
= 33.4÷6 = 5.5
This 5.5 is the usual non square root number to determine does the stock is volatile or not over the past 6 days. To find that please take square too. For that.
√5.5 = 2.3452
So the square root would be 2.3452 as standard deviations. Whenever the final answer of standard deviations is not equal or less than 1 then such stock is considered in the section of Volatility stocks.
Market rule: #100730
Volatility of a stock is not a market rules, it is just a measurement of method to know the sustainability of the market before making any investment.
So any investment decisions that you take based on the volatility of the stock are completely responsible from your side for any losses all because of volatility, you couldn’t raise any compliance when something is not a market rules.
Therefore If your investors and not comfortable or align investing with based on market rules please learn about how to regulate your investments under your control with use of Rule investing.