Investing money is a necessary part of most people's financial plans, whether it involves saving money in a bank account, investing for retirement or using investments to protect and grow wealth. But just as all investments provide opportunities to make money, every investment is subject to instability. An investment's inability to grow at a predictable rate can come from a number of factors, some of which you can control or know about before you invest.
Instability vs. Volatility
Every investment is subject to some degree of volatility. In a financial context, the word volatility refers to the ability of an asset, such as an investment, to see its value change greatly and quickly. Some investments are more volatile than others. These are said to have high volatility. Investment instability refers to how much an investment deviates from its expected level of volatility. For example, stock, which is highly volatile, may need to go through dramatic changes in price before it is considered unstable. An investment that investors judge to be more secure may be considered unstable if it goes through even a slight change in value.
Investments are typically bought and sold on open markets. These include private banks, which offer investment products such as certificates of deposit and individual retirement arrangements, as well as stock markets, bond markets and commodities markets. The open market system means that buyers and sellers are free to negotiate prices, so prices are subject to change over time as supply and demand shift. When supply is high, as when many stockholders wish to sell shares of a troubled company, the value of the investment falls since would-be buyers have more sellers to choose with whom to do business.
Performance and Data
The performance of an investment is tied to numerous pieces of data, all of which can cause instability in the investment's value. Stock may change its value quickly when the company it represents ownership in releases performance data, such as quarterly profits or an annual report. Demand forecasts and other metrics impact commodity investment prices.
Perception and Investor Attitudes
Intangible qualities, such as public perception of an investment and investor confidence, also cause instability in investments. The buyers and sellers who participate in financial markets are subject to making emotional decisions and taking risks based on their own levels of risk tolerance. An investment may become unstable if owners or would-be buyers find a reason to quickly change their attitudes toward it.
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