(Newswire.net — July 15, 2021) — The stock market can be highly volatile and present significant investment risk or generate solid returns for traders who understand how to take advantage of trading volatility. Whenever there is a major market fluctuation, an opportunity arises for shrewd investors to make a kill. The secret is in understanding stock market volatility and the factors that affect index trading volatility.
Defining Volatility
Volatility is a measure indicating how prices in the stock market have deviated from the mean or average return of a security. Standard deviation is the actual measure of volatility as it shows how prices of grouped stocks move around the mean or moving average (MA).
The standard deviation is large when the prices are spread far from each other. When the prices are close to each other, the standard deviation is small.
To fully understand this concept, you have to look at it using an example of a leading index. One example is that of Standard & Poor’s 500 indexes (S&P500). In research conducted by Crestmont, it was revealed that there is a correspondence between high volatility and a higher probability of a declining market. Similarly, a direct correspondence between lower volatility and the rising market was established. This means that the investors can use this information to align their investment options based on the expected returns.
Other major indices trading include Nasdaq Composite Index and Dow Jones Industrial Average. These major indices can be used to analyze factors that affect index trading volatility.
What are the factors affecting volatility?
Many factors affect the index trading volatility. Here are some of the top factors that investors should be on the lookout for:
Interest rates policies
This is one of the leading factors that affect index trading volatility. When a central bank of a country sets the interest rates overnight, the stock markets of the banks will react violently. This is because the interest rates policy defines the direction of the financial market and consumers’ ability to borrow money. This means that the services of the financial services providers such as banks will be influenced, and that must be seen in their stock prices.
Changes in inflation trends
Trends in the industry contribute a lot to market stability. If this can be changed, then the market can react violently because shareholders will be either in a panic mode or too excited if the trend is favorable. For example, if a weather condition in an oil-producing area forces an upward cost of oil, the stock market price of oil-related stocks will shoot up.
Quarterly reports
When a company releases its quarterly reports, it might affect the index trading violently. Whether the report is positive or negative, there is bound to be a change in the stock prices, which makes the stock prices react violently.
Political factors
Global political and economic factors can also influence the price of a stock. Some of the major contributors are general elections or major terror attacks that may affect a company listed on a major index.