While stocks as an asset class can be labeled as volatile, some groups that tend to exhibit more dramatic performance than others. Volatile stock prices can produce jarring price swings within moments, days or weeks, and can turn investors' profits into losses with little warning. Volatile stocks also have the potential to rise to seemingly unreasonable levels and provide investors with the returns they seek in a short amount of time. As a result of the uncertainty surrounding volatile stocks, these investments are considered risky.
Small-cap stocks have a market capitalization, which reflects a company's size, of less than $1 billion. Small stocks are volatile because they have fewer financial resources than larger companies to draw from when business or the economy slows, which places stock prices at risk for declines. Small-cap stock investors are willing to accept that risk in exchange for the growth potential that small stocks possess. Volatility can also work in small-cap stocks' favor to produce higher returns than those offered by the broader stock market.
Stocks with prices that rise to unjustifiable levels considering current earnings or physical assets are volatile investments. While rising prices produce high profits for investors for a time, prices are generally unsustainable without profit growth. During the Internet bubble of the mid-1990s, technology stocks were setting record-high prices with seemingly no end in sight but most did not have tangible assets or profits. By March 2000, the true value of many Internet companies became apparent, and stock prices crashed.
Performance in stocks that trade in the biotechnology sector is generally tied to the success or failure of new drug developments. Considering that drug trials are lengthy and expensive endeavors with unpredictable results, biotechnology stock prices can be highly volatile. In early 2012, when new drugs were approved by regulators sooner than expected, stock prices in this sector advanced 17 percent, which was better than the performance in the broader stock market, according to a 2012 CNBC article. Only months prior, however, some biotech stocks were losing more than 50 percent of their value amid declining drug sales.
Green Energy Stocks
Stocks that trade in the green technology or renewable energy sectors are volatile because the industry is less proven than more traditional energy sources. Performance in renewable energy stocks can be subject to prices in fossil fuels, including oil and gas, in addition to public policy, which makes them vulnerable to changing or expiring laws and incentives, such as tax credits. In 2012, as government subsidies surrounding solar power investments were becoming less generous, investors decided to cash in on their solar-stock investments, causing the sector to lose approximately one-quarter of its value in weeks, according to a 2012 CNBC article.
- The Wall Street Journal: Blue Chips Extend Rally
- Kiplinger:Micro Stocks' Big Payoff
- Fidelity Investments: Balancing Market Capitalization
- The New York Times: In Sliding Internet Stocks, Some Hear Echo of 2000
- CNBC: 6 Stocks Unworthy of Biotech Bull Market
- Forbes: Biotech Busts and Breakthroughs for August
- CNBC: Solar Stocks to Fall Further as Bubble Bursts -- BofA Analysts
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