The movement in the value of a security is known as volatility. Securities that have a higher price fluctuation are said to have higher volatility as compared to securities that have a lower fluctuation in price. Volatility can be used as a measure of risk by the means of observing how much a shares price moves up and down.
In other words, the larger the change in price of a share, the more volatile it is whereas the lesser the change in price of a share, the safer or less volatile it is considered to be. The formula used to calculate volatility is calculation of the standard deviation of the cent change in price of a certain share.
Volatility Index (VIX)
An index that is used to measure the movement in the price of a security is called the volatility index. This tool used to measure volatility in the market is also known as the VIX in more technical terms. It is also known as the fear index as a higher VIX generally determines more fluctuation in the market.
The main cause of the financial crisis was the United States. Stock markets in the U.S.A. do have a volatility index. The highest ever reading on the VIX was in August 2008, valued at 38. Only two months later, this value nearly tripled, touching 89.53. This brought about concerns in the eyes of investors that it could be a sign of the beginning of another ‘Great Depression’.
The VIX was launched in India the year of the financial crisis. It was launched by the National Stock Exchange. It is used to determine movement of share prices in the Nifty 50 index for the next month. “The India VIX is a simple but useful tool in determining the overall volatility of the market. The index captures the implied volatility embedded in option prices. Not only is the volatility index used as an indicator of implied volatility of the market, various tradable products, such as futures and options contracts are available on the volatility index internationally,” said the NSE website.
The highest point the NSE VIX touched was 85 in April 2008 and the lowest ever was 16.7 in March this year. 2010 faced the lowest ever recording on the Nifty VIX which was a good sign for investors where the market would be less volatile and prices would fluctuate less.
Volatility Index clubbed with stock picks available on the internet can help investors reduce losses, making investing in the market more profitable.
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