When you make an investment, you assume a degree of risk. The value of the thing you’ve bought might increase in the future, or it might decrease. In the former case, you could end up making a profit. In the latter, you’ll certainly make a loss.
Different kinds of assets are more prone to big swings in value. These assets are labelled ‘volatile’. If you want to be able to manage risk while trading, you’ll need to develop a good understanding of volatility.
Defining Volatile Stocks
A volatile stock is one that might move by more than around ten percent on a single day. These changes can be driven by surprises in the company’s earnings, or events in the wider world. For example, the value of a tech company associated with AI might swing whenever a new breakthrough is announced.
Volatility can be measured in a number of ways. Standard deviation measures historical changes in value, while ‘beta’ measures how much the company’s value has changed, relative to the wider market in which it exists.
Why Volatility Matters to UK Retail Investors
Volatility isn’t inherently a good thing or a bad thing. Rather, it’s an opportunity for investors to generate gains rapidly – or to lose out rapidly. In recent times, economic events, like the tariffs imposed by the Trump Administration in the United States, and cuts in the Bank of England’s base rate of interest, have led to big swings in the stock market.
Examples of Volatile UK Stocks & Sectors
We’ve already mentioned that tech companies tend to be more volatile. But in some cases, volatility might be inspired in other sectors, as a result of geopolitical events. Shell & BP’s prices have fluctuated as a result of foreign wars. The same is true of British Aerospace and Rolls-Royce, with the fortunes of the latter resting to an extent on the perceived viability of its ‘small modular’ nuclear reactor program.
In recent times, the mining company Glencore has elected to keep its stock market listing in the UK, rather than moving it to the US. This has largely been a reaction to heavy net losses, sparked by the Trump tariffs.
How to Invest or Trade Volatile Stocks
The volatility of stocks can be managed and offset with the right trading strategies. To understand these strategies, it’s a good idea to shun bite-sized wisdom on social media, in favour of a formal stock investing course. This will explain derivatives, spread betting, hedging, and direct equity purchases.
Managing Risks & Long Term Perspective
If you’re assuming risk by trading in volatile stocks, then you might find yourself under greater psychological strain. You’ll therefore need to be able to handle yourself mentally, and to maintain a disciplined, rational approach to trading. You’ll also need to be financially secure enough to play a long game. In the case of volatile assets like Bitcoin, being able to weather storms is critical!
