If the stock market is so volatile, why would I want to put my money into it?

By Investopedia Staff AAA
A:

In this question, volatility refers to the upward and downward movement of price. The more prices fluctuate, the more volatile the market is, and vice versa. Now, to answer this question, we must ask another one: is the stock market really volatile?

The answer is, "Yes, it is … sometimes." The market is volatile, but the degree of its volatility adjusts over time. Over the short term, stock prices tend not to climb in nice straight lines. A chart of day-to-day stock prices looks like a mountain range with plenty of peaks and valleys, formed by the daily highs and lows. However, over months and years, the mountain range flattens into more of a gradual slope. What this implies is that if you are planning to hold a stock for the long term (more than a few years), the market instantly becomes less volatile for you than for someone who is trading stocks on a daily basis.

And in some cases, short-term volatility is seen as a good thing, especially for active traders. The reason for this is that active traders look to profit from short term movements in the market and individual securites, the greater the movement or volatility the greater the potential for quick gains. Of course, there is the real possibility of the quick losses, but active traders are willing to take on this risk of loss to make quick gains.

A long-term investor, on the other hand, doesn't have to worry about this day-to-day volatility of the market. As long as the market continues to climb over time, as it has historically, your good investments will appreciate and you'll have nothing to worry about. Because of this long-term appreciation, many choose to invest in the stock market.

For more details about what stocks are, how to buy them and why their prices change, read this Stock Basics Tutorial.

RELATED FAQS

  1. What is the minimum amount of money that I can invest in a mutual fund?

    Learn about investing in mutual funds even with a smaller initial investment; there are many funds available to investors ...
  2. How do I sign up for a TreasuryDirect account?

    Invest in Treasury securities by dealing directly with the U.S. Department of the Treasury online, conveniently managing ...
  3. How can I get a mutual fund prospectus?

    Read and understand the prospectus before investing in a mutual fund. You can obtain a copy from the fund company, your financial ...
  4. Can I purchase mutual funds for my IRA?

    Learn how to invest your IRA assets in mutual funds. Discover a few of the different types of mutual funds available for ...
RELATED TERMS
  1. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  2. Bulldog Market

    A nickname for the foreign bond market of the United Kingdom. ...
  3. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  4. Float Shrink

    A reduction in the number of a publicly traded company’s shares ...
  5. Capital Strike

    A refusal of businesses to invest in a particular sector of the ...
  6. Gray Market

    An unofficial market where securities are traded. Gray (or “grey”) ...
Related Articles
  1. An Introduction to Government Loans
    Economics

    An Introduction to Government Loans

  2. Can Good News Be A Signal To Sell?
    Fundamental Analysis

    Can Good News Be A Signal To Sell?

  3. Spotting A Market Bottom
    Bonds & Fixed Income

    Spotting A Market Bottom

  4. 7 Steps To A Successful Investment Journey
    Entrepreneurship

    7 Steps To A Successful Investment Journey

  5. Introduction To Asian Financial Markets
    Economics

    Introduction To Asian Financial Markets

Trading Center