Volatility refers to the range of movement back and forth in a stock's price over time. Some investors prefer to avoid stocks that have high volatility because they appear to be a risky investment, with investors having less confidence that a particular short-term trend in the stock's price now will continue in the future. Some investors also take volatility into account when assessing the performance of a fund or fund manager. The theory here is that a fund that has had a good short-term performance by selecting particularly volatile stocks may have benefitted more from luck than judgement.
- Skill level:
Things you need
- Calculator or spreadsheet software
Gather together data on the stock's performance over time. The wider the period of time and the more price points you use, the more accurate the results but the more complex the calculation. A common technique is to use one price for the day from each day, such as the daily closing price.
Add up the stock price for each day and divide it by the number of days to find the mean average price.
Subtract the mean average price from the first day's closing price. This is the deviation. Square this figure (multiply it by itself) to produce the squared deviation. Make a note of this figure. Repeat this process for each day's closing price.
Add up the squared deviation figure from each day, then divide it by the number of days. The result is the average squared deviation.
Calculate the square root of the average squared deviation (divide it by itself.) The result is the standard deviation, which is the measure of volatility.
Repeat the process with other stocks to carry out a comparison. The higher the standard deviation, the more volatile the stock price.
Tips and warnings
- You can use specialist online or downloadable calculator tools to automate this process. Alternatively you can search online for formulae to use in a spreadsheet or download a template file for a spreadsheet.
- Many online financial sites store details of past closing prices for each stock, often listed as "historical data." Some sites let you download this data in a format compatible with popular calculator tools or spreadsheets.
- The standard deviation only measures past volatility. It doesn't necessarily predict future volatility.
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