Calculate Stock Volatility: How to Determine The Risk?

Stock prices fluctuate – that’s well known. How much they fluctuate is expressed in terms of volatility. Another word for it is fluctuation, which says very exactly what it is about.

If you want to invest in a company and consider buying shares in shares, then a look at the volatility – or “Vola” for short – is often appropriate .

Decision using the volatility model

With this model you can decide how many shares can be bought. The calculation is based on the fluctuation range of the share. You have to be clear about how much money you are willing to risk per share. Furthermore, it is important to set a stop-loss level, which regulates from when the securities should be sold again, if the price falls.

The next step is to choose an individual period and determine the highest and lowest price of the stock. For stock investments, the period should be rather larger, often at least one month is recommended. But there are also 10 days, as well as 60 days or more. If these two values ​​have been determined, their difference or distance is calculated.

You also need another number: the all-time volatility, ie the gap between all-time high and all-time low. For the calculation, the ratio of short-term volatility to all-time volatility is now important.

Calculate volatility of stocks

Once you have compiled all the necessary values, the arithmetic can begin. First, calculate the ratio of volatility: 1 – short-term volatility / all-time volatility.

To give you an example, if the short-term volatility of a stock ranges from $40 to $50, the short-term volatility is $10. The all-time high is $70, the all-time low is $10. This results in an all-time volatility of $60. The calculation is therefore: 1 – 10/60 = 1 – 0.167 = 0.83

In this way you can calculate the volatility of the shares. If you want to keep to the volatility model, you now need the chosen maximum risk, how much you are willing to risk from his depot. For example, if you have $10,000 in capital and you want to risk 1%, the maximum risk is $ 100. (0,01 x $10,000 = $100).

It continues with the stop loss. If, for example, this is 3% below the current value, this proportion is calculated depending on the current price. If the stock is currently trading at $44, multiply this value by 3%. The result is then: $44 x 0.03 = $1.32. In order to calculate the number of stocks that can be bought with the above numbers, you now use all previous data.

Number of shares = [(1 – 10/60) x $100] / $1,32 = $83,33 / $1,32 = 63

The bill shows that you can buy 63 shares for the price of $44.

Worthwhile analysis: the volatility of stocks

With the method just presented, how to calculate the volatility of stocks, one already deals more closely with the prices. Otherwise, you may be looking just over the thumb, how many shares you would like to buy from a company.

Whether you want to use the volatility model, you can decide from case to case. However, it basically has the advantage that you ask yourself more questions before investing. These in turn prepare you better for the investment and you know at least exactly why you acquire a certain number of shares.

Of course, even with this method, not every trade becomes a profit, but it adheres to previously set limits. Also in terms of money management, this approach is recommended because it limits the risk.