Finding stocks with strong price movement is an ideal trading strategy
There are many different investment strategies to match the goals and risk tolerance of individual investors. Investors with a low risk tolerance generally prioritize income over growth. These investors may prefer a dividend investing strategy. This is a strategy in which investors choose companies that pay out some of its profit to investors as an added incentive to invest.
However, investors with a higher risk tolerance are more comfortable with market uncertainty. They choose to prioritize growth and are willing to accept the risk that comes when a stock moves in the opposite direction from their position. For more information, check out these best growth stocks.
One way to maximize the return on their investment is to look for stocks with strong price movement, also known as volatility. In this article, we’ll define stock volatility and explain why it’s important. We’ll also explain what affects stock volatility and how to find and invest in the most volatile stocks.
What is Stock Volatility?
Stock volatility refers to the how the value of a particular stock changes in relation to the broader market. The more volatile a stock, the more its price can fluctuate both up and down. Investors have many methods of determining the value of a share and they compare this to the expected value the price per share will reach.
One of the more common ways to find high-volatility stocks is to look at the stock’s beta. Beta measures the relative volatility of a stock in correlation to a particular standard. For U.S. stocks that standard is usually, but not always, the S&P 500.
The key thing to understanding a stock’s beta is its relationship to the number 1. The closer the number is to 1, the more it is correlated to the market; the further it is from 1, the less it is correlated. A beta can also be much higher than 1. There are some stocks that can have a beta of 2 or more.
Another key to understanding beta is that it’s a multiplicative factor. So a beta of 1.3 would mean that a stock is 30% more volatile than the broader stock market. First and foremost, beta is about projecting risk, not return.
Why Volatility is Important?
Volatility is important because it gives investors a range of investment options that allows one to tailor an investing strategy to individual needs. Investors with a long-term view who can afford to risk more can diversify more heavily into some volatile stocks.
Volatility in a stock price can lead to wild swings both up and down. The increased risk of losing money also carries with it the chance for a substantial profit. Some investors have made a lot of money investing in volatile stocks. For example, one strategy might involve buying high quantities of low-priced stocks with the hopes that a small increase in value will result in large overall gains. An important concept to keep in mind is that when selling shares, the transaction only finalizes when a buyer purchases them. Basically, you are not guaranteed the price you request when selling the shares. If the price of the share has dropped before the sale processes, you could end up receiving less. The more volatile a stock is, the more risk and reward can be expected.
What Affects Stock Volatility?
Stock value is a complex subject. Shares of stock are shares of ownership in a company and reflect investor faith in the ability of a company to grow earnings which is the key driver of stock price growth. The stock price reflects what investors will pay for a share in secondary markets. Multiplying the number of shares the company has released by the price results in its market capitalization. This is a common metric used to indicate the value of a company.
Other ways to determine a company’s value include:
- Examining profits or assets
- Analyzing historical price trends to predict future trends
- Using mathematical tools and methods to determine value through other means
In addition to individual investors, there are also portfolio managers, robo-traders, and larger investment organizations making large purchases based on different investing models.
Local and market conditions can also affect a business, which will impact different investing models. Even social and political factors can impact investors around the world. The president can post a comment on social media and prices will fluctuate on the stock market as investors react.
All of these are factors that play a role in stock price volatility. Keep in mind that it may not be easy to get rid of a stock that drops in price drastically. This can make volatile stocks less liquid or less easy to sell. Even as a short-term strategy, it is possible to lose a lot of money quickly.
How to Invest in Volatile Stocks?
There are many ways to trade in volatile stocks. The first step is to determine the acceptable level of risk for a stock to have and then deciding which investment strategy is best for your situation. Some day traders can make many transactions per hour buying and selling shares of the most active stocks. You can use market order to help control the investing process by setting limits on when to buy and sell. However, the possibility of losing more than your sale price is possible in some situations.
Day traders and those who invest in volatile stocks may make a high volume of trades each day to try and capture profit from price fluctuations. Swing traders may take a longer approach by investing in volatile stocks over days or weeks, or even longer. Keep in mind that volatile stocks are risky. If you want to spice up your portfolio and have time to recoup any losses, then you may want to consider short-term volatile stock trading.
Automatic investing or using robo-investors is a growing trend where computer programs use complex algorithms to make buying and selling decisions. You can sign up with free brokerage accounts with low fees and make your own investing decisions. It may be a good idea to seek investment advice from an investment advisor, portfolio manager, financial analyst, or broker.
Investors can set limit orders to buy shares at a specified price. A stop limit is used to sell shares if the price drops below a given threshold, while a sell limit is used to sell a share if it reaches a specified price gain. These tools can help investors with volatile stocks to manage negative swings. In addition to investing in the potential growth of a company, investors can also bet against a company and hope that the share price will drop. This can be used to cover both sides of a price swing to minimize losses but at a reduced rate of return.
How to Find Volatile Stocks?
You can discover volatile stocks by using trusted websites like MarketBeat for up-to-date and useful investor information. One such tool offered by MarketBeat is a stock screener for certain subscribers. A stock screener is a tool to help investors sort stocks by certain criteria. This can help investors pinpoint those shares which are the desired level of volatility. The specific criteria will depend on your investment strategy. You may want to examine stocks with rapid changes in price over a given period. Or you can look for high volumes of trade at low prices and seek out the biggest percentage gainers.
Investors can also invest in volatile stocks through exchanges around the world. One way to find volatile stocks is to calculate the beta, or risk of those stocks, using mathematical analysis. This takes into account past information for the company stock and compares it to a benchmark index of the broader market or of a specific sector. Websites that offer stock investment advice may also list volatile shares for trade.
Price volatility and the movement of price position to market changes are compared to determine the relative risk of any given stock. The most volatile stocks have a higher beta. Companies with a high beta, over a value of 1, generally have a higher implied volatility, while those under 1 do not.
A given value for a company can differ depending on the valuation model used. Some investors look to earnings per share and the financial documents released each earning season to analyze each asset class for investment opportunities. Changes in company profits during any given earning season can greatly impact the value of share prices as investors buy and sell in response.
The downside to using only one strategy to determine value is that it may miss out on red flags that other methods might have picked up on. When looking for the most volatile stocks on the stock exchange, consider analyzing the available information through a variety of tools like those offered on MarketBeat.
Should You Invest in Volatile Stocks?
Before you decide to invest in volatile stocks, you should first consider several factors including:
- Your available investing funds
- The length of time able to invest
- Your retirement and estate plans
- Your overall investing strategy
Investors should also be advised that volatile stocks carry elevated risks that include:
- Changes to market forces
- Changes in investor sentiment which can cause investors to sell
- Companies can go out of business or file for bankruptcy
One way to minimize these risks is to diversify your investments. This may also include engaging in short selling (i.e. investing in a stock with the anticipation it will go down). One way to do this is to find the NASDAQ's biggest losers, so you benefit from a decrease in price. Another strategy is to round out an investment portfolio with some low-risk stocks with a guaranteed low rate of return.
Should You Invest in Volatile Penny Stocks?
Penny stocks are often volatile and should bear careful consideration before investing. Because these are cheap stocks to buy (shares trade for $5 or less), they can be purchased at higher volumes. The idea is that higher volumes allow for greater returns from modest price gains.
However, if you’re just starting out with stock market investing, you may want to avoid penny stocks at first. One reason is that many penny stocks trade at a low price because the company has no revenue or earnings. Also some penny stocks can only be purchased through unregulated markets which add even more risk to investors.
Some Final Thoughts on Volatile Stocks
Investing in the stock market is a proven way to build wealth over the long term. However, the returns depend on individual investing strategies and changes which impact these public businesses. Risk-tolerant investors may choose to look for high volatility stocks. These stocks carry outsized risk for investors because their prices can have large swings in a single day. These rapid value changes offer the potential for outsized gains and outsized losses.
Investors can find high volatility stocks by searching for companies that have rapid changes in their stock price throughout the day. A good way to find these kinds of stocks is to use a stock screener to sort by certain criteria.
Before investing in high volatility stocks, be sure it is a good idea for your investing style. Can you absorb the loss if unpredictable changes quickly lower the value of your shares? Always do your research before investing in volatile stocks. MarketBeat has many tools to help you research a company’s information, past history, and performance.
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