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.
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.