Like all investments, stocks carry certain
types of risk. As an investor, it's important to understand
what those risks are and know how to anticipate them.
Volatility
One of the risks you'll need to plan for as a stock investor is volatility.
Volatility
is the speed with which an investment gains or loses value. The
more volatile an investment is, the more you can potentially make
or lose in the short term.
Similar but different
Not all stocks are equally volatile. The
price of stock in large, well-established companies tends to change
more slowly than stock in smaller, or newer, companies. And the
more predictable and well established a company's business,
the slower the price fluctuation is apt to be.
What's more, the higher a stock's
price, the less impact the gain or loss of a dollar has. If a
stock selling at $60 a share drops to $55 a share in a slow market,
that's an 8% loss, But if a stock selling at $15 a share
falls to $10 a share, that's a stomach-churning 33% loss.
Volatility's rewards
Don't get the mistaken impression that volatility is to be avoided at all costs. It can work in your favor at least as dramatically as it can work against you. In fact, a strong stock market often produces rapidly increasing prices in a relatively short time. That, in turn, can increase the value of your stock portfolio.
