Investors seeking for long term steady and solid returns should always avoid stocks with wild changes value. The long term returns are in danger whenever the stocks extremely go up and down. Besides, it also can be emotionally exhausting for investors. Thus, investing in low volatility stocks is beneficial.
High volatility stocks are risky for those investing long-term, like for retirement plans. It offers a big possibility to lose money quickly. On the other hand, low volatility stocks bring better steady cash, once you know how to spot and calculate them.
Determining the Volatility
Determining volatility, sometimes, can be difficult. You can closely examine the stock price movements, yet, you need to view it out of context.
Don’t forget to also consider the stocks of other companies in the same industry and sector, together with the movement in the general stock market.
Thanks to the advancement of technology, you can measure volatility objectively with online measurements. One of the examples of that measurement is “Beta”. You can find it whenever you research a stock online.
Beta compares a particular company’s volatility to the S&P 500 Index (it tracks the largest companies within the market). If the result score is “1”, then the stock price moves almost perfectly in line with the S&P 500 Index. While if it shows “1.25”, then it is 25% more volatile than the S&P 500 Index.
Most of the brokerage firms will show the Beta for both the company and the industry, whenever it is listing stock.
Low Volatility Sectors
There are industries and sectors which are naturally less volatile than the others. The example for that industry is Tech stocks which are more volatile than utility sectors. Besides, it also notes that usually bigger companies’ stocks tend to be less volatile than the smaller ones.
Many financial advisors also tell their customers that staples sectors have low volatility which can generate strong returns. Staples sectors include companies producing our daily needs, like food, beverages, and household items.
Thus, these companies will not experience extreme earnings swings, resulting in stock prices that don’t swing wildly, either.