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.

Key Takeaways

  • The relationship between a stock’s volatility and trading volume depends on the type of trading orders. 
  • Stock volatility increases with unexpected earnings results or company/industry news. 
  • A superficial analysis of beta and volatility shows that stocks with higher trading volumes have higher volatility and vice versa. 

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's 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 two key reasons why volatility might occur in a stock: 

  1. 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.
  2. 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 stocks in that industry.

Low Volatility Stocks

Also, stocks that trade at very low volumes, which are far less liquid than those with higher average volumes, can have 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.

Measure Volatility 

One of the most popular measures of a stock’s volatility is beta. Beta is how volatile a stock is relative to the broader market—generally the S&P 500. Analysis of beta shows that higher daily volume means higher volatility. 

Consider some of the most heavily traded stocks—Chesapeake Energy (CHK), General Electric (GE), Advanced Micro Devices (AMD), Ford (F), and Bank of America (BAC). These stocks trade an average of at least 49 million shares a day. However, their volatility is varied, which includes Chesapeake with a 2.5 beta, Advanced Micro Devices at 3.1, while Bank of America, GE, and Ford have betas around 1. 

On the flip side, companies that trade with lower volume, including China Telecom Corporation (CHA), Formula One (FWONA), The Liberty Braves Group (BATRA), and ORIX (IX) have lower betas. All these companies trade with daily volumes of less than 100,000. Meanwhile, these companies have betas that range from 0.55 to 0.9.