Volatility can be explained as the variability of returns across time for a particular security or market index. Short-term traders, for example, quantify it as the mean difference between a stock's daily high and low, divided by the stock's price. A stock that moves $5 per day for $50 is thus more volatile than one that moves $5 per day for $150 because the percentage change is more significant than the first.
Trading the most volatile stocks is a profitable strategy because these stocks theoretically provide the most significant profit potential. Many traders seek out these stocks without risk but face two key challenges: identifying the most volatile stocks and trading them using technical indicators.
The term "stock volatility" refers to the fluctuations in the value of a particular stock. The more volatility stock has, the more likely its price will swing in both directions. The price indicates the market's willingness to pay for a particular share of a company's stock. Investors use various techniques to determine the value of a share and compare it to the predicted value at which the price per share will trade. Purchasing and holding a low-priced stock with the expectation of appreciation entails risk. Stock prices can decline rapidly during a bear market as investors flee. There is a possibility that some stocks will be highly volatile, resulting in massive losses after the market closes. The more frequently a share price varies, the greater the implicit risk. While investors may be able to profit from volatile markets in the near term, the odds of long-term success may be stacked against them.
Why is Volatility Important?
Volatility in a stock price can result in large swings in either direction. The increased danger of losing money also increases the possibility of making a significant profit. Specific individuals have amassed substantial wealth by investing in volatile stocks. For instance, one strategy would entail purchasing a large number of inexpensive stocks in the belief that a minor increase in value results in significant aggregate gains. A critical notion to remember is that the transaction is not complete when selling shares until a buyer acquires them. In essence, you are not assured of getting the price for the shares you sell. If the share price decreases prior to the sale, you may receive less. The more volatile a stock is, the larger the risk and reward.
Volatility is critical because it provides investors with various investment options, allowing them to adjust their investment strategy to their specific needs. Investors with a long-term perspective and the ability to take on additional risk can diversify more heavily into some volatile stocks. To round out their investment portfolios, these investors generally include low-risk stocks with a low guaranteed rate of return.
What Factors Influence Stock Volatility?
Stock valuation is a complex subject. Stocks are ownership interests in stock and show investor confidence in the company's potential to grow and pay dividends. The price represents what investors will pay in secondary markets for a share. Market capitalization is calculated by multiplying the number of shares issued by the price, and this figure is sometimes used to illustrate the company's value.
Other additional methods for determining a business's value include assessing its income or assets. Additionally, you might evaluate historical price trends to forecast future trends. Confident investors employ mathematical tools and approach to ascertain value in different ways. Along with individual investors, portfolio managers, robot traders, and larger investment companies make large purchases based on various investment strategies.
Local and market factors can also affect a corporation, affecting various investment methods. Even social and political variables can affect investors worldwide. The president can comment on social media, and in response, stock market prices will move. Stock volatility is caused by numerous factors that affect stock prices. Bear in mind that it may not be possible to sell a stock that has experienced a significant price reduction. This can reduce the liquidity of volatile stocks and make them more challenging to sell. Even as a short-term plan, it is feasible to lose a significant amount of money swiftly.
How to Find the Most Volatile Stocks
Day traders frequently target stocks with large price fluctuations and a low float. Volatile swings in stock prices provide additional trading possibilities and an opportunity to profit quickly.
Individuals can utilize a robust stock screener to identify stocks that fulfill specified criteria. For example, you can locate stocks that frequently suffer price volatility on a high trading volume with a little flat gap up a given amount. Alternatively, they can use historical price and charting patterns to identify stocks that are expected to be volatile on a specific day or trading hour.
Determining the most volatile stocks is not complex and does not entail constant research or stock screening. Rather than doing that, you can create and maintain a continuous screener for regularly volatile stocks.
Volume is especially critical when trading volatile stocks since it facilitates entry and exit. Additionally, you can use this tool to filter stocks between $10 and $100 in price and an average daily volume of more than 4 million in the last 30 days. Additionally, if you are just interested in stocks and not exchange-traded products, adding a filter such as "exchange is not American Express" helps eliminate leveraged ETFs from the search results.
A more time-consuming method is to search for volatile stocks manually each day. Top1 Markets offers a free version that displays the day's top gainers, losers, and most volatile stocks. Utilize the screener to narrow down results based on market capitalization, performance, and volume. This narrowing of the search offers traders a list of stocks that meet their particular parameters.
Additionally, Nasdaq tracks the top gainers and losers on the NASDAQ, NYSE, and AMEX stock exchanges. These are unfiltered results that reflect simply that day's volatility. Thus, the list identifies possible volatile stocks, but traders must sort through the results to determine which stocks have a history of volatility and sufficient volume to merit trading.
Should We Invest in Volatile Stocks?
Before investing in volatile stocks, individuals should examine various considerations. It is critical to ascertain the available investment money, the time horizon for investment, retirement and estate planning, and overall investing strategy. A popular method is to diversify investments in order to reduce total risk. These risks can include changes in market forces, other investors losing faith and selling, and firms going bankrupt. One investment strategy is to gamble against a stock, such as the NASDAQ's most significant losses, to profit from a price decline.
Confident investors choose to invest in companies that pay regular dividends. With enough dividend shares, investors can frequently generate a sizable monthly income. Other investors seek capital gains when a stock's price rises significantly. Both strategies have tax ramifications. Generally, the longer an investment is held (at least a year), the more favorable the tax treatment.
Day traders and investors in volatile stocks may execute a large number of deals per day to profit from price changes. Swing traders may take a longer view, investing in volatile stocks for days, weeks, or even more extended periods. Bear in mind that volatile stocks carry a high level of risk. If you want to add some spice to your portfolio while still having time to recuperate any losses, you can explore short-term volatile stock trading.
5 Most Volatile Stocks
There are numerous opportunities for investors to make a return on their investment. Investing in the stock market is one strategy that has proven to be beneficial over time. The returns are contingent upon individual investment strategies and changes affecting these publicly traded companies. Different trading techniques enable investors to profit from changes in the price of a stock, and adding automatic trading rules to the mix can assist further in limiting losses. Regardless of the case, volatile stocks risk investors due to their quick and unpredictable price prices. However, these rapid value shifts also present an opportunity for rapid gains.
Investors can identify volatile stocks by looking for shares that fluctuate significantly in price during the day. Stocks with a market capitalization of under $5 are referred to as penny stocks and can be somewhat volatile. An intelligent technique to find this kind of stock is to sort them using a stock screener. Before investing in volatile stocks, ensure that they are a good fit for the rest of your investment portfolio. Consider the following five most volatile stocks.
1. Simon Property Group (NYSE: SPG)
The Simon Property Group is the largest mall operator and real estate investment trust in the United States (REIT). Commercial and residential real estate is in an uncomfortable state of limbo due to the coronavirus, as reflected by the SPG ticker.
Simon property group lost 66 percent of its value after the Covid-19 outbreak. It subsequently recovered and reached a high of $121.
2. Urban One (NASDAQ: UONE)
Protests and civil disturbances across the United States have a ripple effect on the business community. Investors are voting with their money, and Urban One is one of the beneficiaries of this increased interest in social relations.
The entertainment conglomerate's material is geared toward African Americans. Its stock soared from a $1 to 2 penny stock to a $54 high, with daily swings of 100%, give or take a few percent.
The corporation has two distinct share classes. The class A shares are denoted by UONE, while UONEK denotes the class D shares. The only significant difference between the two is voting rights.
3. Alterity Therapeutics (NASDAQ: ATHE)
Alterity Therapeutics Limited, founded in 1997 in Melbourne, Australia, is a biotechnology firm focusing on discovering medicines for people living with neurodegenerative disorders. Its unique drug, ATH434, is used to treat Parkinson's disease patients.
The biotechnology company's stock has a market capitalization of $60 million. It traded as low as $0.28 and as high as $5.15 over the last 52 weeks. Alterity Therapeutics has a high level of liquidity, with over 2.3 million shares traded daily. It earned revenue of $108 million in 2019.
4. HD Supply
HD Supply is one of North America's foremost industrial wholesalers. It has over 80 years of experience supplying clients with industry-leading maintenance, repair, and operations products. HD Supply operates over 44 distribution sites in 25 states throughout the United States and Canada. Over 200,000 SKUs of high-quality products are available at the distribution locations.
The industrial stock has a market capitalization of $9 billion and earnings per share (EPS) of $2.54. It traded as low as $21.69 and as high as $55.89 during the last 52 weeks. HD Supply maintains a high level of liquidity, transacting more than 18 million shares every day. It earned $6 billion in revenue in 2019.
5. Carver Bancorp (NASDAQ: CARV)
COVID took a toll on the financial industry, and Carver could not dodge the shrapnel. Before the crisis, it was trading at a penny stock level and lost half of its worth once COVID was discovered.
Investors discovered it and increased it tenfold between June 8 and June 15, depending on modifications made by the corporation for its clients throughout the outbreak. Carver is now one of the best-undervalued bank stocks under $20.
Things to Consider Before You Invest in Volatile Stocks
The most volatile stocks present good short-term investment opportunities for skilled day traders. Before entering a trade, it is necessary to consider the high trading volume and narrow bid-ask spreads.
The long-term investor seeks a stable and predictable market with low volatility and sustainable growth, whereas day traders seek to enter a trade at periods of extreme volatility.
The SEC protects private investors through the pattern day trader rule, which requires a minimum balance of $25,000 today to trade actively. Swing trading is permitted in both margin and cash accounts.
Long-term investors are more concerned with growth stocks than the most volatile ones. Technical indicators can refine the search, and good platforms such as Trade Ideas provide over 500 distinct filters and trading alerts.
Investing in the stock market typically yields positive results. Traders may feel compelled to execute trades if a share price is $1 or if the stock goes up 100%. However, while it may be tempting to begin investing in such stocks, traders must determine whether the risk is justified in light of the profit potential. Trading volatile stocks is a double-edged sword; the upside potential is extraordinary, but the downside danger is exceptional.
Those who specialize in options trading should also consider that volatility increases the premium required to trade the option.
What Should You Do in a Volatile Stock Market?
Resist the temptation to sell merely based on recent market fluctuations. Selling stocks during a market decline might result in a permanent loss of gains. While staying the course may be emotionally draining, it may benefit your portfolio. This is not to say you should cling on blindly; rather than being swayed by noise and anxiety, we recommend considering an investment's future possibilities and its role in your portfolio.
Consider the long term. Markets fluctuate, and you'll likely encounter multiple central falls throughout a long investing career. However, even bear markets—periods during which the market falls by more than 20%—have traditionally been relatively brief compared to bull markets. Because it is practically difficult to time the market's ups and downs, all investors would benefit from ignoring the noise and remaining focused on their goals.
Conduct a risk assessment of your risk tolerance and risk capacity. Risk tolerance refers to your emotional capacity to deal with large price swings; risk capacity refers to your financial capacity to absorb a loss. Market downturns can serve as a wake-up call to reevaluate your risk tolerance, but we recommend waiting until you're calm. However, risk capacity may — and should — be assessed at any moment. Do you have enough cash on hand to meet short-term objectives? The money you may need shortly or cannot afford to lose is best invested in relatively stable assets such as money market funds, certificates of deposit (CDs), or Treasury bills. If you're retired, have the next 12 months' worth of living expenses in a bank account or money market fund and a few additional years' worths in bonds. It matures when you need the money—and can help you maintain your composure during periods when stock markets are volatile.
Ascertain that your portfolio is diverse. Volatile markets might also reveal that investments that their owners believed were adequately diversified are not. If you haven't recently reviewed your portfolio to ensure that you understand what each asset class is performing and that the mix fits your goal asset allocation, now is an excellent time. Schwab's investor profile quiz can assist you in determining your profile and matching it to a target asset allocation that is appropriate for you.
Consider adding defensive assets to your portfolio for added stability. When stocks are falling, defensive assets such as cash and cash equivalents, Treasury securities, and other US government bonds can help stabilize a portfolio. Additionally, suppose you anticipate spending from your portfolio in the next few years. In that case, it is prudent to invest in assets that have historically been more liquid and less volatile than stocks, such as cash and short-term bonds. This can assist you in avoiding the need to sell during a low market.
As necessary, rebalance your portfolio. Market fluctuations can cause your allocation to deviate from its intended aim. Over time, assets that have increased in value will make up a more significant portion of your portfolio, while those that have decreased in value will make up a smaller portion. Rebalancing entails selling assets that have become overweight compared to the remainder of your portfolio and investing the proceeds in underweight positions. It's a great idea to repeat this procedure regularly.
Adapt your trading strategy to volatile markets. If you are forced to trade in volatile markets, consider current market conditions while placing orders. Exercise caution when trading during the session's opening and closing hours, typically the most volatile. Consider trading more minor positions and "scaling" in or out of positions by purchasing or selling stock in small amounts as the price moves. You can use defensive strategies such as stop orders and stop-limit orders to protect an unrealized gain or limit possible losses on an existing position. 1 These can assist you in automating your decision-making and reducing your reliance on doing the right thing in the heat of the moment.
Conclusion
Volatile stocks appeal to traders due to their potential for a quick profit. Trending volatile stocks frequently offer the most profit potential, as traders benefit from a directional bias. The disadvantage is that losing trades will ensue when the trend is broken. Monitoring price action and ensuring that the price makes a higher high and higher low before initiating an uptrend trade (or a lower low and lower high prior to joining a downtrend trade) will assist in mitigating this fault.
Volatile stocks do not always trend; they frequently oscillate. When the stochastic hits an extreme value (80 or 20) and then reverses, it signals that the range continues and presents a trading opportunity. However, no indication is perfect; constantly monitor price action to establish whether the market is trending or ranging to apply the appropriate tool.
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