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How to Measure a Stock's Volatility

written by: tomdon•edited by: Jason C. Chavis•updated: 6/28/2010

The stock's volatility can be measured by calculating its standard deviation explained in the following steps. These steps are to be performed for calculating how to measure a stock's volatility during a 20-period standard deviation.

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    What is Stock Volatility?

    A stock's volatility is also referred to as the change in price that is best measured by its standard deviation over a period of time. In general, the measure of a stock's volatility varies from the average value over a measurement period. The volatility varies such that if the price variation is on a day to day basis, the volatility will be high and if the price variation is low on a day to day basis, the volatility will also be low.

    Market volatility is also defined as the rate in which a security changes and the market security is measured by watching the daily change in market price. Volatility is one of the most important things to be kept in mind while investing capital in a mutual fund or hedge fund.

    The volatility describes both the hike and downturn in the market. However, usually the major decrease in price is generally looked up. Whenever a particular stock is moving up and down on the share market, the stock is known to have a high level of volatility. Moreover, if the share price stays comparatively the same for a long period of time then it is assured that it has low volatility.

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    Calculating or Measuring the Stocks Volatility

    MAKE PT1410 To calculate or measure the stock’s volatility, follow the step-by-step guidelines mentioned in this section of the article. To ease the calculations, you will require a simple calculator.

    Step Number One: Calculating the Average

    Calculate the simple average of the closing price or mean of the closing price using the calculator. The simple average or mean for 20 days is calculated by adding all the 20 closing prices and then dividing the sum by 20. The value obtained by performing this calculation is known as the variance of the stock.

    Step Number Two: Evaluating the Deviation

    After calculating the variance, subtract the average closing price from the actual closing price for each period. This method will help us to calculate the accurate deviation for each period.

    Step Number Three: Square the Deviation

    Next you need to square the deviation of each period.

    Step Number Four: Finding the Sum of the Deviation

    Add the squared deviations obtained from step three to obtain the sum of the squared deviations.

    Step Number Five: Calculating the Standard Deviation

    In this step you need to divide the sum of the squared deviations by the number of periods to obtain the standard deviation value. Usually the standard deviation value will be equal to the square root of that number.

    The above steps will help you measure a stock's volatility and it helps the business to be in a secure and good position. Even though this has discouraged many investors, it is essential for all investors to understand a stock’s volatility to get through the ups and downs in the market on a long term basis. Stock volatility can be accurately represented in a line chart.