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What is volatility? Volatility is a measure of the risk of an investment. A highly volatile stock will be up one minute, down the next. In more technical terms, volatility measures the standard deviation of the returns of a stock.

Over the course of the day a stock will go up and down, in a random way. So over a long period there is an average drift in stocks, mostly in the upward direction, so it's goes up more than it goes down.

But that upwards climb is normally quite small in short time scales, of order a day. So when you look at stocks over such short time periods they'll on average be pretty much up as much as down. So don't all those ups and downs cancel out so you're left with a nice smooth return? Unfortunately not. Say a stock fluctuates up and down about 2% in the course of a day. Then after a year (around 200 trading days). The price of the stock at the end of the year is expected to be up or down 2% times the square root of 200, or about 28%. That's not as bad as 2% times 200, but it's certainly not negligible.

This volatility is the reason why investing is so hard for people to understand and keeps the sleazy hot-stock-predictor-software guys all in business. If you invest in a stock after purchasing their software and get a 28% return on your investment, that'd make you happy. But you'd expect to get that kind of return a lot of the time by chance. When you buy the software and loose 28%, which is pretty much as likely, you'll think that their software sucks. Actually it could be working (which of course it's not) and you wouldn't be able to tell because on average it might be giving you 5% better returns than your dog picking stocks (which it's not) and you wouldn't be able to tell because the results are being swamped by volatility.

So as I've said, your dog picking "hot" stocks is going to be as good on average, as some software you're using to pick stocks. Testing out which is better isn't easy because of volatility. Sometimes the dog will do 20% better than the software, sometimes it'll be vice-versa. You'd have to run the program and keep bowser picking stocks for years in order to figure this one out. The main thing about investing isn't picking a hot stock. It's reducing your risk. That is, getting that 28% uncertainty down. Now you can stop wondering what is volatility and start assessing investing risks with our free stock comparison software.