How to Measure Volatility of a Stock

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Stock price swings and changes help investors calcualte risks.
Stock price swings and changes help investors calcualte risks. (Image: stock market analysis screenshot image by .shock from <a href='http://www.fotolia.com'>Fotolia.com</a>)

The volatility of a stock is the term used to describe the changes and range of a stock price. Volatility is tracked and monitored more closely in short-term trading and options trading. Beta is an extension of volatility as beta is a stock's volatility in relation to the volatility or movement of the market as a whole. Understanding a stock's volatility helps investors understand the direction the stock is most likely headed next. Stocks with higher volatility have more price movement and are more attractive to those hedging their investments and those looking to exercise put and call options.

Things You'll Need

  • Calculator
  • Spreadsheet program
  • Notebook and pens
  • Internet access

Create a spreadsheet to compile and calculate stock price information. Make a separate page in the spreadsheet for each stock you are going to track to keep things simple and organized until you get accustomed to keeping and reading this type of data. For each stock make a column for historical stock prices and another for daily stock prices.

Make a list of the stocks you have holdings in currently and those that you are considering investing in. Write down stock names, trading symbols and stock prices with dates. Access historical stock price data and copy the information directly in to the spreadsheet you created.

Enter all historical information in to the spreadsheet. At a minimum you will need one month worth of daily stock prices to get started but for better results six months of historical stock price data is good.

Calculate what is known as the average closing price. This is done by finding the average of the stock price based on a period of time. Taking the six-month window of historical data as an example, you would find the average price of a stock over six months by adding all of the daily prices from the six-month range and dividing that number by 183. A different example would be for a 20-day period; add all 20 daily numbers and divide by 20 for the simple average.

Take the average closing price and calculate the difference between that average and the actual closing price. If you are using a spreadsheet you would create a third column for this information. This number is what is known as the deviation.

Square the deviation number and then add together all of the deviations for the time period that you are tracking. Then you take that sum of the squared deviations and divide that number by the time period you are tracking. For example, in the 6-month example you would divide the sum of all squared deviations by 183.

Take the square root of the last number calculated and you are left with the standard deviation. A higher standard deviation number means higher stock price volatility which then implies more pricing swings and movement, which is attractive to higher risk investors.

Tips & Warnings

  • Always check with a financial adviser before making investing decisions based on your own calculations.
  • Never trade stocks unless you can afford to do so; invest in the stock market carefully.

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