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Explain the effects of volatility?



New York - In simple terms, volatility means price swings (or up and down movements) in prices of individual stocks or market indexes during a set period of time. Incorporating the effects of volatility in the design of your investment strategy is crucial. Consider the below:

  • Logical Information Machines, a research firm based in Chicago, estimates that since 1945 the Dow Jones market index has increased or decreased at least 1% in a day about 2300 times or an average of 44 times a year. During those days, if you sold an investment of $100,000, volatility could have resulted in a difference of $1,000 up or $1,000 down.

  • Some technical analysts believe that volatility is a precursor of a negative or bear market while other investors believe that it can also signal movements up.


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