the difference between Market Volatility and Market Risk?
One of the most commonly mixed-up concepts in investing is market volatility and market risk. Many people think they are identical, and that’s not true. Let’s be clear on these terms through this blog.
What are Risk and Volatility?
Volatility is the upward and downward trend swings in market indices/interest rates. An investor doesn’t have any control over it. Market risk, on the other side, is a personal matter like possibility or chance of an injury, loss or hazard, or how much financial uncertainty an investor can tolerate. The person’s psychological state is responsible for the risk.
Volatility in the stock market can be measured in different ways. The difference between the maximum return and the minimum return is the simplest way. But the more accurate method preferred by analysts is to measure using “Standard Deviation”.
But in case of risk, there is no such measure to calculate. In financial terminology, risk refers to the potential permanent loss of money. Technically risk tolerance means different things to different people. “You don’t really know your tolerance for risk unless and until you have knowingly been through it.
How is Risk different from Volatility?
While they are closely related, it’s important to not confuse market risk with market volatility.
Market risk cannot be measured, while volatility can be measured in various ways. Risk can be defined by the capital loss while volatility cannot be defined by capital loss. Capital risk can be minimised as it depends on an individual psychological state while volatility cannot be minimised. Volatility is a historical concept while the risk is relayed to the future. Risk is subjective to nature while volatility is objective in nature.
How to Optimize market volatility?
Market volatility is seen as a security’s tendency to noticeably spiral up and down within a short period of time. But this movement may not always have a downside. Once people stop seeing this phenomenon as detrimental, they will see it as opportunistic. Short-term fears cloud an investor’s judgment and strategizing ability. Market volatility is inevitable and one needs to find a way around it.
When a storm hits, it does not call for an exit strategy. It’s vital to understand the potential advantage of investment opportunities that arise from market volatility. Below are two strategies to help in leveraging volatility for one’s own benefit