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http://www.commonwealth.com/RepSiteContent/stock_volatility.htm
When the stock market goes up one day, and then goes down for the next
five, then up again, and then down again, that’s what you call stock
market volatility.
In layman’s terms, volatility is like car insurance premiums that go up
along with the likelihood of risky situations, such as if you have a
poor driving record or if you keep the car in a high-theft area.
Some cynics say volatility is a polite way of referring to investors’
nervousness. Investors may think volatility indicates a problem. But
many analysts believe that increased volatility can indicate a rebound.
Volatility is measured by the Chicago Board of Options Exchange (CBOE),
primarily through the CBOE Volatility Index (VIX) and, to a lesser
extent, the CBOE Nasdaq Volatility Index (VXN) for technology stocks.
The VIX tracks the speed of stocks’ price movements in the S&P 100;
the VXN tracks it in Nasdaq 100 stocks. Both indices take a weighted
average of the estimated volatility of eight stocks on a particular
index. Both are calculated every 60 seconds over the CBOE’s trading day,
which means it records a great deal of fluctuation.
Seasoned traders who monitor the markets closely usually buy stocks and
index options when the VIX is high. When the VIX is low, it usually
indicates that investors believe the market will head higher. This, in
turn, can trigger a market selloff, as speculators try to unload their
holdings at premium prices.
Historical data has shown that wild market movements precede a change in
the market’s direction. A high VIX appears just before a market rally,
and a low VIX usually augurs a slide.
Bearish types argue, however, that any value to the VIX’s past behavior
ended on September 11. They say the market is up against too many
things, including the economy, wary investors, and ongoing fear of
terrorist attacks. Others blame volatility on 24/7 financial news on
cable and the Internet, since people can watch the market move in front
of their eyes.
So what’s an investor to do? For starters, remember that success in the
market does not depend on predicting the future—predictions only measure
the short term. Volatility is more dependent on mass hysteria—fear and
greed—than on underlying economic or financial events. Those are not
reliable emotions on which to base long-term investment decisions.
All Indices are unmanaged and are not available for direct investment
by the public. Past performance is not indicative of future results.
When the stock market goes up one day, and then goes down for the next
five, then up again, and then down again, that’s what you call stock
market volatility.
In layman’s terms, volatility is like car insurance premiums that go up
along with the likelihood of risky situations, such as if you have a
poor driving record or if you keep the car in a high-theft area.
Some cynics say volatility is a polite way of referring to investors’
nervousness. Investors may think volatility indicates a problem. But
many analysts believe that increased volatility can indicate a rebound.
Volatility is measured by the Chicago Board of Options Exchange (CBOE),
primarily through the CBOE Volatility Index (VIX) and, to a lesser
extent, the CBOE Nasdaq Volatility Index (VXN) for technology stocks.
The VIX tracks the speed of stocks’ price movements in the S&P 100;
the VXN tracks it in Nasdaq 100 stocks. Both indices take a weighted
average of the estimated volatility of eight stocks on a particular
index. Both are calculated every 60 seconds over the CBOE’s trading day,
which means it records a great deal of fluctuation.
Seasoned traders who monitor the markets closely usually buy stocks and
index options when the VIX is high. When the VIX is low, it usually
indicates that investors believe the market will head higher. This, in
turn, can trigger a market selloff, as speculators try to unload their
holdings at premium prices.
Historical data has shown that wild market movements precede a change in
the market’s direction. A high VIX appears just before a market rally,
and a low VIX usually augurs a slide.
Bearish types argue, however, that any value to the VIX’s past behavior
ended on September 11. They say the market is up against too many
things, including the economy, wary investors, and ongoing fear of
terrorist attacks. Others blame volatility on 24/7 financial news on
cable and the Internet, since people can watch the market move in front
of their eyes.
So what’s an investor to do? For starters, remember that success in the
market does not depend on predicting the future—predictions only measure
the short term. Volatility is more dependent on mass hysteria—fear and
greed—than on underlying economic or financial events. Those are not
reliable emotions on which to base long-term investment decisions.
All Indices are unmanaged and are not available for direct investment
by the public. Past performance is not indicative of future results.
© Copyright 2008 Commonwealth Financial Network[/size]
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