Top 3 Causes Of Volatility In The Market

While volatility in the market is indeed normal, various situations can determine why it happens, and if it will be high or low. The following are some of the common causes of volatility in the stock market or even in an industry

Volatility represents all the situations when the price of a stock in the stock market fluctuates. Depending on the riskiness of the security or the time between when you purchase the security and sell it, the volatility might be high, changing erratically, or it could be at a low rate.

While volatility in the market is indeed normal, various situations can determine why it happens, and if it will be high or low. The following are some of the common causes of volatility in the stock market or even in an industry.

The Political Terrain

Starting from the wider landscape, it is not surprising that politics plays a key role in the volatility of a market or a specific industry. Businesses by virtue of their contribution to an economy’s growth are connected to the pulse of any government.

On the other hand, through taxes, tariffs, and even federal spending in specific industries, decisions made or announced by the government can cause the entire market to make swift decisions and cause fluctuations in the market.

The Economic Landscape

At the extreme level, the reason recessions are bad is because when an economy is doing badly, the businesses under it are generally doing badly too. And because information or news is what drives market forces to react, news of economic instability might cause investors to withdraw their funds from the market.

Things like information on inflation or consumer spending in an economy can have an impact on how the overall market performs. When there are crises in the economic terrain, volatility occurs.

When new economic policies are made, volatility in the market could also occur showing the attitude of the market, whether good or bad.

Disasters

When acts of God like earthquakes or Tsunamis happen, the entire market involved takes a dip.

However, disasters do not always need to be tied to the overall economy. Sometimes, an individual company might be involved in a situation like a case of fraud that causes bad public relations and causes investors to lose their confidence.

When the news emanating from a company is good, then the company might be seen as stable and it might cause prices to rise and more people buy their stocks.

But when bad news infiltrates the industry the company is in or directly to the company, the price might drop. These movements based on the availability of information is a big cause of volatility.

It is important that while the investor waits out periods of volatility by investing for the long term, that he or she seeks to consider the reasons why such volatility occurs in the first place as it might reveal a deeper issue that could even cause the viability of the entire investment to change.

However, for most cases of volatility, time will even things out as it always does.

Written by Lawretta Egba.