Investment experts debate the reasons for the volatility of the stock market. Some researchers claim new forces influence the major spikes in stock market returns; others cite traditional forces at work in creating the huge shifts. Market swings create problems for new stock buyers who fear uncertain investments. The volatility also makes firms fear putting up public stock offerings and creates negative undercurrents for the general economy.
The "New York Times" noted the increased frequency of market swings in 2011 and speculated that larger swings might be business as usual for the future of the stock market. The newspaper defined major "market swings" as increases and declines between 3 and 4 percent of the market returns. Yale School of Management professor Roger Ibbotson defines volatility as approximately 20 percent a year, with a change of 5.8 percent a month. Researchers at the "New York Times" examined historic swings in the Standard and Poor's 500 stock index beginning in 1962 and claim the data shows indisputable proof of larger and more frequent market swings beginning in 2000. The VIX Index tracks market volatility each year.
Old-school forces impacting the stock market include political and economic instability. Lack of confidence breeds market swings, and those swings contribute to a sag in confidence in the stock market as a vehicle for investment. This circle of fear causes investors to buy and sell in volume to create profit and then do the same to avoid potential financial disaster. The economic dislocation of 2008 shook the confidence of many investors; just as the market collapse did in 1929. Recovery for a stable market environment requires rebuilding investor confidence.
The new forces at play in the stock market include online, automated stock trading -- known as intra-day trading -- and increased access to instant news reporting. The large-scale instability of the world economy also factors into the new forces impacting market volatility. Exchange-traded funds also impact overall market trading. ETFs combine stocks for sale in groups known as "creation units," as opposed to stock offerings representing individual firms. Large companies and investors buy creation units and split these up for smaller investors. ETFs also swap the creation units for other securities in a complex system of stock trading allowed under the current U.S. Securities and Exchange Commission laws. Trading in the large stock blocks contributes to larger fluctuations in the market.
If investors had the power to predict major market swings on a regular basis, the economy would have a large number of millionaires made rich by stock investments. Savvy investors and investment advisers consider both new and old market factors and develop models to weigh the impact of potential swings using the history of the stock market. Political and economic instability, for instance, impact some stocks more than others, and important court rulings or federal grants typically factor more into the market volatility of one stock sector over others. Tracking trends helps investors make educated guesses for stock purchases.
Video of the Day
- New York Times: Stock Market's Sharp Swings Grow More Frequent
- U.S. Securities and Exchange Commission: Exchange-Traded Funds (ETFs)
- CNN Money: ETF Center
- Bloomberg: S&P 500 Tumbles to Four-Month Low Amid Economic Reports
- Bloomberg: Most U.S. Stock Rise as Greece Tempers Spain Concern
- Qn: Why Does Market Volatility Matter?
- University of Washington: Pricing Stock Market Volatility -- Does It Matter Whether the Volatility Is Related to the Business Cycle?; Chang-Jin Kim, et al.
- Rice University Jones Graduate School; Do Macroeconomic Variables Predict Aggregate Stock Market Volatility?; Bradley S. Paye
- stock chart image by selim kisa from Fotolia.com