Volatility
How much an asset's price fluctuates over time. High volatility means larger swings. It measures turbulence, not direction, and it is not the same thing as risk.
Volatility measures the size of an asset's price movements (the amplitude of the swings, up or down). It says nothing about direction: a market can be volatile while rising or while falling.
Volatility is often used as a shorthand for risk, but the two are not identical. A permanent loss of capital is a risk; a temporary, recoverable swing is volatility. Confusing the two leads investors to sell turbulence at exactly the wrong moment.
Related terms
- DrawdownThe decline from an investment's most recent peak to its subsequent trough, in percent. It is a direct measure of pain endured, and of the gain needed to recover.
- Market regimeA persistent market environment (trending, calm, or turbulent) that a rules-based reading identifies from price behaviour, rather than a prediction of what comes next.
Read it in context
- GoldGold has no issuer, no contract and no internal cash flow: nothing about it pays you for holding it. Its return comes entirely from the change in its price, which makes it a different kind of asset from a share or a bond rather than a defective version of either.
- Price, value and expectationsA price is not a measurement of what something is worth. It is what buyers and sellers will trade at now, and it already contains what they collectively expect. That is why an announcement can be good and the price can still fall.
- What a drawdown isA drawdown is the fall from a previous high down to the low that follows it, measured as a percentage. A second measure is its duration: the time spent below that high before it is regained. The two are read together to understand what holding the investment involved.