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What Are Volatile Stocks?

Volatile stocks are equities that see large price swings (up or down) in a short timeframe. Stocks that quickly achieve highs or lows or move erratically have high volatility. Stocks that maintain steadier prices or move slower have low volatility

Volatile stocks, explained

Stock market volatility measures how far the overall stock market’s value moves up or down. Volatility often occurs when significant events (like a global pandemic or war) foment uncertainty. But individual stocks can see volatility, too. 

What are volatile stocks?

Volatile stocks are those that experience rapid price movements in a short time span. Even relatively stable stocks may be more volatile following key events like:

  • Quarterly earnings report
  • New regulation announcements
  • Legal actions for or against the company
  • Natural disasters that affect the company’s bottom line

Some stocks are more prone to volatility than others. For instance, blue-chip stocks rarely see the same enormous price swings as fast-scaling tech or healthcare firms. However, every stock – even blue-chips – has the potential for volatility. 

The psychology of volatility

Volatility is often associated with negative sentiments like fear, which may arise during stock crashes or bear markets. But volatility only measures a price swing’s size – not its direction. A run-up in price, like you see in meme stock rallies, also counts as volatility. 

Another framing is to think of volatility as a measure of short-term uncertainty or exuberance. In the moment, investors may focus on news or fads and act accordingly. But when the heat dies down, prices level out and volatility often ends. 

Types of stock volatility

When looking at volatile stocks, you can look at either historical or implied volatility. 

Historical volatility measures how volatile an asset was. Also called statistical volatility, it gauges volatility by measuring past price changes in a set timeframe. 

Implied volatility estimates how volatile an asset will be. Because this volatility forecast is calculated using forward-facing put and call option data, it’s not a guarantee of performance. Rather, it measures future expectations. 

Measuring volatility in stocks

You can measure stock volatility several ways. 

Standard deviation is a common method that measures the average amount a stock’s price varies from its mean (average) over time. 

You can also look at maximum drawdown, which measures an asset’s largest historical losses in a set timeframe. 

Beta is another common metric that helps investors compare an asset’s volatility to the S&P 500 Index. While a beta over 1 indicates a security is more volatile than the S&P 500 (like growth stocks), a beta under 1 suggests the stock is less volatile (like utilities).  

How do volatile stocks affect you?

Volatility can be anxiety-inducing – but the reality is, your portfolio needs some volatility. While highly volatile stocks trade larger gains for more risk, low volatility stocks build steadier gains over extended timeframes. Mixing the two allows you to balance short- and long-term rewards with palatable risk. 

And though long-term investors are generally advised to ignore short-term volatility, you can still use volatile stocks to your advantage. (For example, buying quality stocks at a discount when prices drop suddenly.)  

Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

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