Risk & Volatility
Understand volatility and manage risk
If the markets simply rose steadily upward every day, investing would be a much easier proposition — one without risk. But in reality, the market is volatile, with ups and downs that affect your investments. Understanding volatility is important when developing an investment strategy — one that manages the inherent risk associated with investing.
What contributes to volatility?
There are a broad range of factors that influence the price of securities from companies (stocks) and other issuers, such as government agencies or municipalities (bonds):
- Financial fundamentals — Fluctuations in profits, earnings and cash flow affect security prices.
- Market psychology — Perceptions often influence the markets as much as reality. Optimism leads prices up, while uncertainty and negativism can cause a decline in a sector or the entire market.
- Economic factors — Economic indicators (e.g., gross domestic product, employment, inflation), housing statistics, oil prices and industry-specific factors all affect investors.
- Major events — Acquisitions, product innovations, corporate scandals, natural disasters and political changes can have a major influence on a company, industry or entire market — as illustrated in the chart below.
Volatility and bonds
Bonds, on average, have historically tended to be less volatile than stocks — but may also experience price variations from year to year, as shown in the chart below. Factors that affect bond prices include changing interest rates, shifting supply and demand dynamics and the level of perceived risk in the stock market.
You can not invest directly in an Index.
Learn more
Explore other Investing Essentials topics through the menu to the left. Access extensive reference materials through the Literature Library. Or contact a financial advisor for advice on the right investment strategy for your specific goals.