What is volatility?

How it is worked out

Take the price's move each day, in percent. The standard deviation says how far the moves usually are from their average. Per day the number is small, so it is usually scaled to a year. A year has about 252 trading days, and random moves grow with the square root of time, so the daily figure is multiplied by the square root of 252, about 15.9.

For the S&P 500 since 1928, the standard deviation is 1.19% a day. Times the square root of 252, that is 18.9% a year.

The market swings more in some years than others

The swing was largest in 1932, 53.4%, and smallest in 1964, 5.3%. That is 10.2 times as much. Wild days tend to come in clusters, and so do calm ones, so a figure from a calm year says little about a wild one.

This year the index has so far swung 13.8% a year, less than the average since 1928.

What the number doesn't tell you

Volatility counts rises and falls the same way. A stock that climbs sharply gets as high a volatility as one that falls as much. Nor does it say how deep a fall can go. The largest fall from a high is a separate measure, covered in Two ways to measure risk. A single company nearly always swings more than an index of many companies, which the lesson on diversification works through. How much a company moves on a normal day is the next lesson.

These figures are historical, worked out on days that have already happened. An option's price also implies a volatility, the implied one, which reflects how much the market expects the stock to move. It is covered in the lesson on what sets an option's price.