volatility
The degree of variation in the price of a financial instrument over time; a measure of risk.
Example
“Cryptocurrency has much higher volatility than government bonds.”
Memory Tip
VOLAT-ility — volatile things fly around unpredictably. High volatility = prices jumping all over the place.
Why It Matters
Volatility directly affects your investment returns and sleep at night. Understanding how much a stock or fund bounces around helps you decide if you can handle the ups and downs emotionally and financially, which is crucial for staying invested during market downturns.
Common Misconception
Many people think volatility means an investment will lose money, but it simply measures price swings in either direction. A volatile stock could go up significantly or down significantly, so high volatility does not automatically mean poor returns.
In Practice
Imagine Stock A trades between $95 and $105 over a year while Stock B trades between $80 and $130 over the same year. Both have the same average price, but Stock B is much more volatile. If you needed the money in six months, Stock B could be worth significantly less when you need it, making its higher volatility riskier for your timeline.
Etymology
From Latin 'volatilis' meaning 'flying, fleeting' — prices that fly up and down unpredictably.
Common Misspellings
Learn personal finance fundamentals free
Related Terms
More in fundamentals
Other fundamentals terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.