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Volatility

Volatility refers to the fluctuations in the price of a security, commodity, currency, or index.

Volatility refers to fluctuations in the price of a security, commodity, currency, or index. The higher the volatility, the riskier the asset is deemed to be. That's because the price of the security can change dramatically over a short amount of time and it can go in either direction. In contrast, lower volatility means that the asset's value does not fluctuate dramatically, and is relatively steady.

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One general way to measure volatility is to look at the beta coefficient (see entry on "beta"). This measures the historical movement of a financial instrument against a suitable baseline (a FTSE 100 stock against the FTSE 100, for example). A stock with a beta of 1.0 would be expected to move roughly in line with the market.

However, for long-term investors, volatility is arguably of limited use the biggest risk to a long-term investor is the risk of permanent capital loss, rather than temporary ups and downs in a stock's price, for example.

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