What Volatility Is

• Volatility in the stock market is the amount, in both speed and size, that prices change over a given period. Like all open markets, stock prices rise and fall according to demand: High demand raises prices, while low demand drives them down. Volatility measures the amount of price change over time, that is, the value of a price rise -- or drop -- within a specific period. Greater changes over shorter periods of time are considered "highly volatile," meaning that the likelihood of a large swing in price is greater than at a period of low volatility. Increased volatility results in increased risk: more price swings mean more opportunities for a price to drop dramatically. It also means a greater reward potential: Prices can and do rise dramatically as well.
  
  

Beta

• The volatility of an individual security price is known as "beta" and represented by that Greek letter. Beta compares price changes for an individual stock or mutual fund to the average price changes of the S&P 500 stock index -- a group of 500 middle-sized companies traded on the New York Stock Exchange. A beta of more than 1.0 means that the security is more volatile than the S&P 500, while one lower than 1.0 means a more stable price.
  
  

Reporting Market Volatility: Indexes

• Analysts use indexes to chart volatility within the stock market as a whole. The most famous of these is the Dow Jones Industrial Average, which is commonly quoted in market reports. Indexes are groups of stocks, divided by category, and the average price movement of these groups reflects volatility in the market as a whole. Changes in indexes only report the past, however; they cannot predict future volatility.
  
  

Predicting the Future: VIX

• When it comes to predicting future volatility, it is useful to gauge investor confidence in the future market. For this, analysts turn to options. Options are contracts that offer the right to buy or sell a security at a particular price at some point in the future. The Chicago Board Options Exchange tracks changes in option prices for the S&P 500 Index on the Volatility Index, or VIX. The VIX reflects what investors and traders believe will happen in the next 30 days. A high VIX means that the market is distressed -- people are buying more options to protect their stock positions from price swings. A low VIX means that investors are comfortable with the level of volatility in the market.