Understanding market volatility and how it can make you a better investor

Image source: LOM Financial

Fluctuations in the market and the instability of the numbers related to major stocks basically describe stock market volatility. When the market goes up on a certain day and suddenly goes down the following week only to go up again the week after is a perfect definition of this financial phenomenon that has continued to challenge investors for many decades. One important question to ask when trying to understand volatility is, what fuels it? What are the factors that cause the market to drop, to recover and drop again just like that?

Short-term market drops, for example, Is one of the drivers of a high volatility. History teaches us some of the best examples of the causes and effects of market volatility. For instance, during the turn of the century when the tech bubble finally collapses, the event caused a dramatic burst of volatility. Another example of a major volatility-stimulating circumstance is after the 9/11 attacks when fear and uncertainty loomed in the U.S.

Fear can be one of the most effective drivers of volatility and its influence on market insecurities can be fully observed in every financial crisis that the global economy experiences. Usually, investors and financial analysts can see a rise in volatility coming, because of the existence of volatility-related notes and funds.

The VIX (Cboe Volatility Index) for instance, is a well-known volatility index. The product, attached to the S&P 500 options, is dubbed as the “fear gauge” that measures market risk. The gauge is a useful indicator that helps investors make the best decision especially given the state of today’s global economy.