Understanding the Difference Between Risk and Volatility in the Stock Market

Author: George Davis

what is risk

Among many confusing terms in the stock market, risk tolerance and volatility troubles investors the most. Many beginner traders often confuse one for the other and end up exiting the market too soon. If you are looking to find the differences between risk and volatility, you are in the right place. In this blog post, we will share some of the key differences between these terms and explain their impact on your trade.

What is Risk?

In finance, risk refers to the degree of uncertainty one has regarding a particular investment. Risk arises due to various factors and some of which are uncontrollable. For instance, risk related to economic and political factors cannot be mitigated. However, using proper investment analysis and using a stop-loss strategy can mitigate risk to a certain extent.

What is Volatility?

Volatility is the dispersion of returns for given marketable security. In simple terms, it’s the fluctuation of a stock price that results from market forces or company performance. Volatility is related to price changes. Although both terms seem interrelated, they are worlds apart. Many investors confuse risk with volatility and vice versa. At best, it leads to unnecessary stress and worries. By going through the differences between risk and volatility, you can make better investment decisions.

Difference Between Risk and Volatility

The primary difference between risk and volatility is that risk can be mitigated to a certain extent while volatility is uncontrollable. While risk is always adverse, volatility can be used by experienced traders to their advantage. The wild swings both ways can be timed perfectly to exit the market with millions of dollars. Being unrealistic and going beyond the 2% rule of risk-reward ratio can sometimes lead to substantial losses.

On the other hand, the risk is dependent on volatility. When a particular stock rapidly moves up and down, entering this market is a risk. However, age plays a significant role in determining your risk tolerance. Most investors enter volatile stocks in their mid-20s to mid-30s.

Furthermore, volatility reduces over time, and young investors enter a volatile market for long-term investment when they see future growth. However, the risk increases over time if you ignore the stop-loss strategy and stick too long to a bullish market.

While risk and volatility are different from each other, some traders still confuse these terms together. The best way to memorize their difference is to know that taking high-risk yields better profits. Still, it can also damage your finances with the same value. Once you know the difference, volatility comes to mind naturally.

Concluding Thoughts

Risk and volatility are two closely tied terms and often get the best of even professional investors. If you want to clarify the difference between risk and volatility, we recommend visiting Proficient Trader for more information. You can find tons of content related to the stock market and improve your investment portfolio. Moreover, you can also leverage from proficiency traders top stock picks and make better investments.

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