If you are thinking about investing money on the global financial markets there are lots of factors to consider. From identifying buying opportunities to formulating an investment plan and managing your investment portfolio – there is much to think about. One key concept that all investors should know about is market volatility. But what exactly is it?
Market volatility explained
In simple terms, volatility is the amount of change the price of an investment sees over a period of time. High volatility sees a lot of price changes in shorter time-frames in an upward and downward direction, while low volatility means that a price doesn’t fluctuate much over the longer term.
Although easy to understand, volatility is actually one of the fundamentals of investing that investors sometimes get wrong. Higher levels of volatility are not always a bad thing. In fact, they are needed for you to make any money on your investments at all!
Why is volatility sometimes a good thing for investors?
- Ability to make money – if there were no volatility in the market, prices would not change over time, so the chance of your investment increasing in value is dramatically reduced. All investors need good levels of price movement to allow them to get a decent return on their initial outlay of Aussie dollars.
- Bigger profits – high volatility means that the market prices will go much lower or higher than you would normally see. Naturally, this means that you stand to make even more money on your investment if you have bought the right shares.
- More investment opportunities – another reason to embrace volatility is because it offers more opportunities to invest on the financial markets. As it allows prices to dip to new lows it presents you with the chance to invest at a better value price. That would not be possible on a less volatile market where the prices would not get to that level of greater value.
- Important for many strategies – many successful investors and investment strategies use volatility as an important element. With a very calm market, this central aspect of many investment strategies is not in play which means the strategy cannot be used effectively.
As you can see, some volatility is essential to make money and grab the best buying opportunities. Of course, it is always best to fully understand concepts like this when investing so specifically research stocks, Forex or CFD basics so you can invest in them successfully.
Don’t let volatility scare you
Many Australian investors are afraid of operating in a volatile market, but you really should not be. If you remember that it is simply a chance to make more money and invest in a way that brings greater opportunities, then you will soon see its worth. For many investors in the Australian markets, it actually plays a key role in how they make their returns over the short and long term.