Market volatility refers to the extent to which the price of an asset fluctuates up or down over a period of time.
In the stock market, prices do not always move steadily because they are influenced by investors' emotions, expectations and actions.
When investor sentiment changes rapidly, stock prices can also experience large movements in a short period of time.
For example, one day investors may be confident that the economy is growing and start buying stocks in large quantities.
However, when negative news appears the next day, they may panic and sell their holdings.
These changes in confidence and fear cause stock prices to move up and down more significantly. The greater the change in investor emotions, the higher the level of market volatility.
To understand this concept easily, imagine that there are two types of stocks. “Turtle” stocks move slowly, such as RM100 on Monday, RM101 on Tuesday and RM99 on Wednesday.
These small price changes indicate that the stock is more stable. On the other hand, “monkey” stocks move more wildly, for example from RM100 on Monday, up to RM101 on Tuesday and down to RM70 on Wednesday.
These stocks have a higher level of volatility because their price changes are difficult to predict.
Several factors can cause market volatility, including important news, company performance reports, investor fear, market excitement and investor actions that follow the decisions of others.
Although not all people invest in stocks, market volatility still indirectly affects daily life.
Uncertain market conditions can affect economic sentiment, company investment decisions, job opportunities and consumer confidence to spend.
Therefore, understanding the concept of volatility helps people see why financial markets often change so quickly.
Investors usually measure the level of volatility using several indicators such as the VIX or ‘fear index’, standard deviation, and Average True Range (ATR).
In short, the higher the reading of this indicator, the greater the price changes that occur in the market.
Understanding volatility helps investors make better decisions and be prepared for the risks of market changes.
