By Bob Gillingham - Important terminology you should know before you start investing


We define risk in finance by its volatility. The volatility is simply the amount of up and down movement of the price of an investment over time.

Low Volatility

An example of a low volatility investment would be a savings account at a bank which might not vary at all for several years.

High Volatility

An example of a high volatility investment could be a growth stock in a volatile sector such as technology.

In General...

Usually low volatility (low risk) will bring an investor a low return, while a high volatility (high risk) can be an investment with large positive (or negative) returns.

Diversification and Time

Volatility can be tempered by diversification and also additional time invested.

Diversification Example

An example would be investing in a single technology stock versus investing in the Standard and Poor 500 stocks (which includes a large representation of technology and other sectors.

Time Example

The time example would be illustrated by investing in the Standard and Poor for a 3 month period (potential high volatility) vs a 10 year investment.(usually a lower amount of volatility.

What's Next On Investing?

Next Story: Cycle of Market Emotions

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