Volatility refers to the upward and downward movement of price. The more prices fluctuate, the more volatile the market is, and vice versa. Higher volatility means that prices can change dramatically over a short time period in either direction.
Is the Stock Market Really Volatile?
Yes, the market is sometimes 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.
This implies 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.
For example, during the five-year period from 2013 to 2017, the Dow was up 84 percent, the Nasdaq surged nearly 122 percent, and the S&P 500 rose 82 percent.
How Volatility Affects Short- and Long-Term Investors
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 securities — the greater the movement or volatility, the greater the potential for quick gains. Of course, there is the real possibility of quick losses, but active traders are willing to take on this risk 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 stocks, including how to buy them and why their prices change, read the Stock Basics Tutorial.)