Introduction to Volatility for Kids and Teens
This video explains the concept of volatility in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about volatility, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is volatility
- Is volatility the same as risk
- What causes volatility
- Why is volatility important – and how to deal with it
- Additional thoughts and considerations
What is volatility?
Volatility describes how quickly and by how much a security or an index can fluctuate in price.
An investment that is very volatile can have large price changes over a short period of time. But an investment that is not volatile will not change in price quickly.
Volatility is expressed as a percentage, and represents price movements across different durations like daily, weekly, monthly, etc.
There are two main types of volatility: historical volatility is based on past performance, while implied volatility makes predictions about a security’s price movement in the future.
Volatility Index VIX, created by the Chicago Board Options Exchange (CBOE), is an index that shows the stock market’s expectations of volatility for the next 30 days.
Is volatility the same as risk?
Volatility and risk are not the same. Volatility is the fluctuation in the price of a security – which could go up or down, whereas risk is the possibility of losing your money.
Often, volatility contributes to risk, but it is only one of the factors that decide how risky a security is. Another key factor is the company’s fundamentals.
What causes volatility?
A number of factors can impact volatility – from political factors like government policies, war, and international trade agreements, to economic factors like inflation and unemployment numbers.
Some factors might affect volatility in specific sectors or industries, like major breakthroughs in medicine impacting pharmaceutical companies, or adverse weather impacting agriculture-dependent companies.
Why is volatility important? And how should I deal with it?
Volatility is important because it’s an integral and unavoidable part of investing. It is not necessarily a bad thing.
So instead of thinking of ways to avoid it altogether, or getting swayed by market fears and doomsday predictions, you can use it to your advantage by using tried and true investing strategies.
One such strategy is Dollar Cost Averaging, where you invest a fixed dollar amount every month irrespective of market movements.
This way, for the same dollar amount, you buy less when the price is high, but more when the price goes down – bringing down your average purchase price and taking advantage of volatility.
Additional thoughts and considerations
When making an investment, it is important to think about how volatile it is. At any time, you should not invest in something that is unnecessarily risky.
If a security is volatile but also has a high possibility for gains, then it might be good to have it in your portfolio when you are investing for something a long time into the future – like retirement.
Even if the price goes down drastically, if you don’t need the money anytime soon, you’ll not be forced to sell at a loss. If you are patient and disciplined, the investment will bounce back and you will make profit in the long run.
In fact, as long as you are confident in your investment, you can buy more at a discount!
More safe and conservative investments should be used when investing for something with a shorter investment horizon – like down payment on a house.
Bottomline: Use volatility to your advantage, and pick your investments wisely keeping in mind their volatility and your investment time horizon.