Are Higher Volatility Stocks Right For You?

While higher volatility stocks have greater profit potential, they are also the most volatile and risky to trade. These stocks are often based on morning price gappers and have double-digit price swings. New traders should stick to familiar stocks and gain experience in consistency before moving up to these volatile stocks. The following information can help you determine whether a stock is suitable for you.

Less volatile stocks have a stronger relative performance than lower volatility stocks

Despite popular belief, there is no definitive evidence to support the idea that less volatile stocks outperform higher volatility ones. There is some evidence to support the idea that lower volatility stocks have higher returns on average. The low volatility effect, known as the “low volatility anomaly,” is best understood when considering portfolio-level effects, such as compounding and rebalancing.

Although the theory behind this finding is still unclear, it’s still plausible to draw a simple correlation between volatility and performance. Investing in less volatile stocks is a good way to limit risk and stay invested in equities even during volatile times.

The lower volatility stocks had a strong relative performance during the recent up market, while the higher volatility stocks had a weaker performance. The illustration below compares the two-cycle periods of high and low volatility stocks in the last few years. The up-cycle periods are long, whereas the down markets are typically shorter and steeper.

The volatility of stocks can be correlated with economic data and political events. Volatility is typically low during a calm economic or political environment, but it can also be high during a time of heightened uncertainty. A good example of an event that may increase volatility is a severe hurricane or an economic recession. These events may have a large effect on oil prices. This could have a negative impact on companies with high costs.

In addition, investing in shares of profitable, mature companies that have historically experienced lower volatility can help to mitigate portfolio risk. The best way to determine if a stock is less volatile than the broad market is by using a mathematical measure called beta. A beta reading of more than one indicates a high level of volatility. A beta value below one indicates that a stock’s price has historically been more stable than the market.

When looking at the volatility of stocks, the less volatile stocks have a stronger performance than their high-risk counterparts. This is true both in absolute and relative terms. In the US and UK, the lowest-volatility stocks have historically generated higher returns, despite their lower risk.

Investing in low-volatility stocks can prevent significant losses in high-risk stocks. These types of losses can damage a portfolio beyond repair. Moreover, a stronger return is required to offset these losses. This makes investing in less volatile stocks more attractive.

Although low-volatility stocks have historically outperformed higher-volatility stocks, they have not kept pace with the cap-weighted index in recent years. Moreover, they did not provide much downside protection during the COVID sell-off in 2020. This has left many investors wondering if the low-volatility factor has broken. To answer this question, let us examine the low-volatility stocks’ performance in different market cycles and compare them with a basket of high-volatility stocks.

They tend to be more stable

High volatility stocks have done well relative to low volatility stocks during the most recent up market. The low volatility illustration represents early-cycle periods and later-cycle periods. Up markets can last years, while down markets are shorter but have steeper declines. While investors should remain in stocks that have good fundamentals, volatility can be risky.

Volatility is the rate at which the price of a stock changes over a specific period. Higher volatility is generally a sign of higher risk, but it can also give investors an idea of the range of price changes. This measure of volatility is often expressed as the standard deviation of annualised returns. High volatilitystocks often have rapid price swings, while low volatilitystocks tend to be stable and consistent.

Some of the highest volatility stocks include technology, healthcare, and oil. These sectors have experienced higher volatility in recent months due to concerns over trade wars. Lower demand for oil has also affected the market. Other factors that increase volatility include geopolitical events, like an attack on Saudi Arabian oil facilities.

Some other factors that affect the price of stocks are the type of business and economic conditions. For example, the prices of oil can increase if there is a major weather event. Companies whose products depend on oil may see their stock prices fall due to the increased costs of oil. Further, increased government regulations may also cause increased costs for oil-related companies. This may affect future earnings growth.

As a rule of thumb, high volatility stocks are better than low volatilitystocks. Although high volatilitystocks tend to have higher risk, it doesn’t necessarily mean that high volatility stocks are a good investment. The right combination of low-risk high-return stocks can help investors avoid the risk of significant losses. If a stock loses a large amount of value during a volatile period, it will be harder for the investor to recover without a higher return.

While lower volatility stocks may be better for trading, the risk of a sudden drop may not be worth the high risk and high reward. This is because high volatility stocks tend to have wide price swings, which makes them riskier. Nevertheless, these volatile stocks can offer investors a large payout if they buy low and sell high. There are savvy traders who earn a good living by accurately timing the market. However, such tactics should only be used by experienced investors.

Higher volatility stocks are a good choice for day traders. On the other hand, investors who plan to hold their investments for longer periods should consider investing in low volatility stocks.

They tend to be undervalued

As the economy continues to suffer from a high level of uncertainty, some investors have been moving into defensive positions. This is true of stocks like Verizon and Berkshire Hathaway, which have both been undervalued recently. Yet, this move hasn’t worked for all investors. Currently, all sectors are down at least 10%. That’s because investors are flocking to the defensive sectors, but this strategy isn’t paying off for all investors.

When looking for undervalued investors should pay attention to the volatility of a stock. High volatilitystocks often experience significant price swings during their most recent trading session. This is due to the significant gap between their intraday highs and lows. Some of the other characteristics that make a stock highly volatile include a high PE ratio, high debt levels, and unpredictable earnings.

Historically, investors who focus on higher volatility stocks are likely to make more money than those who invest in low-risk. The higher volatility of a stock means it has a higher risk of falling below its fair value. Traders often overreact to bad news, resulting in a lower stock price.

While investors tend to advertise lower volatilitystocks in a positive light, low-volatility stocks have consistently underperformed portfolios of high-volatilitystocks over the long-term. However, it’s difficult to quantify the impact of these factors.

As a result, they often trade at much lower prices than blue-chip companies. In these instances, the low investment input can be profitable and help minimize the risk. However, because of the high volatility, these stocks may not have as high a demand as blue-chip companies. As a result, investors may shy away from investing in them during times of stock market downtrends.

While this may not be practical for a short-term trader, investors should consider holding high volatilitystocks for an extended period of time. While high volatilitystocks are more risky, they have better odds of earning higher returns for those who hold them for the long-term. By buying when a stock is cheap and selling when it has already reached its price peak, a contrarian investor will benefit.

While you can’t find the best stock for your needs by analyzing past volatility, you can use the Fin viz free stock screener to find stocks. This tool lists the most volatile stocks, including top gainers and losers. It’s also possible to narrow your search based on volume, market cap, performance, and other criteria.

In order to invest in stocks, it’s important to understand the nature of volatility. Many different market issues can cause this including rising rates, which may cause investors to dump overvalued growth and move into energy and finance stocks.