A:

Stock volatility refers to a drastic decrease or increase in value experienced by a given stock within a given period. There is a relationship between the volume of a traded stock and its volatility. When a stock is purchased in large quantities, the stock price or value goes up sharply, but if the stock is sold in large quantities a few minutes later, the price or value of the stock experiences a sharp decrease. In other words, volatility occurs when there is an imbalance in trade orders for a particular stock.

For example, if all or a majority of the trade orders for a particular stock are "sell orders" with little or no "buy orders", then the stock value will sharply decrease. So, the relationship between a stock's trading volume and its chances of volatility depends on the types of trading orders that are being received. If the stock's traded volume is high, but there is a balance of orders, then the volatility is low.

There are many reasons why volatility might occur in the stock market. Some of those reasons are:

  • Unexpected earnings results - If a company reports earnings that are better than expected, then there will be a lot of buy orders and the stock value increases. However, if the earnings report is lower than expected, then the stock value will go down.
  • Company or industry news - If there is good or bad news from a company or the industry then there is an increase in volatility for the company's stock or the stocks of companies in that industry.

Also, stocks that trade at very low volumes, which are far less liquid than those with higher average volumes, can have a higher volatility than their higher volume counterparts. In relatively illiquid stocks, any trading that is performed can have a drastic effect on the stock price because so few orders are placed. It is almost always safer to trade stocks with higher average trading volumes than stocks that are considered to be illiquid.

For more, see Tips For Investors In Volatile Markets.

This question was answered by Chizoba Morah.

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

    In this question, volatility refers to the upward and downward movement of price. The more prices fluctuate, the more volatile ... Read Answer >>
  2. Why is trading volume important to investors?

    Learn about trading volume, its importance and how investors analyze volume to confirm a trend or reversal in a security. Read Answer >>
  3. When does a growth stock turn into a value opportunity?

    Learn how fundamental analysts use valuation measures, such as the price-to-earnings ratio, to identify when a growth stock ... Read Answer >>
  4. Why don't stocks begin trading at the previous day's closing price?

    Most stock exchanges work according to the forces of supply and demand, which determine the prices at which stocks are bought ... Read Answer >>
  5. What is the Uptick Volume formula and how is it calculated?

    Learn more about uptick volume, a measurement of the number of trades that take place during a time when an asset's price ... Read Answer >>
Related Articles
  1. Trading

    The Most Volatile Stocks With Volume For Short-Term Traders

    Looking for big daily moves with volume that makes it easy to get in and out. Here are four of the most consistently volatile stocks, with significant volume.
  2. Trading

    How To Choose Stocks For Day Trading

    Discover some of the contributing factors in determining what stocks are best for day trading.
  3. Investing

    How To Choose Stocks For Day Trading

    Day trading entails trading a stock several times over a day in an effort to profit on its price movements. It’s a risky strategy, but can pay big returns.
  4. Investing

    Is a Stock's Trade Volume Important?

    Stock volume is easy to calculate but understanding its importance is a little more involved. Take the time because it's a worthwhile investing tool.
  5. Trading

    Essential Strategies For Trading Volume

    Looking to trade using volume? Have a look at these essential tips.
  6. Investing

    How The Stock Market Works

    When you buy a stock, you buy a piece of a company.
  7. Trading

    Volatility's Impact On Market Returns

    Find out how to adjust your portfolio when the market fluctuates to increase your potential return.
  8. Insights

    3 Ways To Tell If Your Stock Has Bottomed

    No one can call stock bottoms with absolute certainty, but there are some common trends that appear when stocks are about to hit bottom.
  9. Trading

    What's In Store For These Stocks With Unusually High Volume?

    For these four stocks with recent usually high volume, the overall technical picture will be used to help gauge in which direction the next tradable moves will be.
  10. Trading

    Interpreting Volume For The Futures Market

    Learn how to read the volume reports, look at the relation to liquidity and interpret volume using open interest.
RELATED TERMS
  1. Average Daily Trading Volume - ADTV

    The average amount of individual securities traded in a day or ...
  2. Technically Weak Market

    A market in which open interest is increasing and prices are ...
  3. Uptick Volume

    The volume of shares of a security that are traded when the price ...
  4. Technically Strong Market

    A market in which both open interest and prices are increasing ...
  5. Gather In The Stops

    A trading strategy of driving down a stock's price by selling ...
  6. Sell Plus

    An order to sell a quantity of stock at a price that is above ...
Hot Definitions
  1. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  2. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  3. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  4. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  5. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  6. Merchandising

    Merchandising is any act of promoting goods or services for retail sale, including marketing strategies, display design and ...
Trading Center