Volatility

Volatility is a measure of the intensity of price fluctuations of a financial instrument – such as a stock or ETF – within a given period. Statistically, it is usually calculated as the standard deviation of returns around a mean value.

In practice, volatility is considered a key measure of risk: high volatility means that the price fluctuates sharply up and down. While this offers higher profit opportunities in the short term, it also carries a considerable risk of loss. Investors distinguish between historical volatility, which is based on past values, and implied volatility, which reflects market expectations for the future.

While traders want to actively use fluctuations to make profits, long-term investors cushion volatility through diversification and a long time horizon. This is because market turbulence is usually short-term in nature, so price fluctuations even out over time.