Aside from price and stock volatility, there are still many other forms of volatility. It’s not smart to just ignore them just Guide to Inventing because you think you already know which volatility will affect you more.
Volatility refers Contract for Difference to the fluctuations in the movements of the assets and securities. Typically, investors believe that higher volatility means higher risks. Meanwhile, a huge chunk of those investors also believe that higher risks mean higher potential profit. Therefore, higher volatility means more profits.
However, it’s not as simplistic as it sounds. It is still very elementary that we know which kind of volatility we are talking about.
Historical volatility is the amount of volatility that a stock has during the past 12 months or 1 year.
If the stock’s price fluctuate widely during the 12-month period, it simply means that the stock is quite volatile. Therefore, it’s riskier. For investors who have low risk tolerance or who are simply averse to risk, this kind of stock is unattractive.
However, as we’ve mentioned above, riskier stocks tend to be more potentially profitable. The catch is that you may have to hold on to it for a longer period of time before the price can reach an ideal level for you to sell it for a profit.
If you plan to invest in historically volatile stocks, you must make use of some charts and tools and perform some analyse to know if the stock’s price has a low or high point. After you’ve spotted those points, you would know when to hold on to the stock and when to sell it.
Market volatility refers to the speed and direction of the price changes in any market, including the commodities, currencies, and stock market.
If you think you see a high level of volatility in the stock market, it tells you that the market is nearing a market top or a market bottom, caused by a lot of uncertainties in the market.
For bullish traders, good days are those in which they can top up prices. On these days, news are positive and the company outlooks are good. Meanwhile, bearish traders think that a bad day is time for pushing prices down.
Implied volatility is more about the future profitability of a stock. It refers to the amount of volatility options traders think the stock will have at a later time.
To determine the implied volatility of a stock, you have to focus on the variations of the stock options prices. If options prices are already increasing, the implied volatility will also increase.
To benefit from the knowledge of implied volatility, you can buy an option on the stock once you see indications that it will get more volatile. If you managed to be right, the options price will be higher, giving you a chance to sell it for a profit. But remember that the best time to sell an option is the time when it gets less volatile.