Hi and welcome to this week’s ‘question of the week’! The word that will be covered is ‘volatility’, which will be found in the following question:
What drives stock volatility?
The term volatility can be used to describe something that is unstable, unpredictable, and affected by external factors. An example would be when a person is at first peaceful, and then suddenly shows an outburst of anger. Another example would be a person who randomly shows aggression, which is triggered by the environment. These are forms of unstable and volatile behavior. The stock market shows this type of behavior as well, as any form of new knowledge would lead to the buying or selling of stocks. But what exactly drives stock volatility?
There are an endless amount of reasons why the stock of a company rises and drops in price. Examples include natural disasters that stop the flow of raw materials, national problems that stop imports and exports, and labor disputes that halt operations. Company statements that introduce for instance change, a new product line, or problems between managers, also influence the price of the stock. There is however only one factor that drives it, information. This is why when the CEO is usually replaced when a company performs poorly for a couple of periods. An individual would not want to own stock of a company when hearing negative news, whilst wanting to own stock if they hear for instance a new, more efficient form of technology to be used in their production facility. Thus, information about and from the company drives stock volatility.
In short: Volatility can be defined as something that is unstable, unpredictable, and affected by external factors. Stocks are volatile because depending on what information is heard about the company, it determines whether somebody buys or sells stock. Thus, information drives stock volatility.
If you would like to voice out your opinion, or believe that what was written is wrong, then please do not hesitate to leave a comment!
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