Finance markets have a steady factor to be considered: risk. When we invest our money in any asset, we take a risk, because it is not given for sure that the value will increase so much as we expect. Even we cannot be sure if the value will increase.
The analysis about the risks in our investments has to take into account two measures: liquidity and volatility. The liquidity reports about the asset’s ability to be sold without changing significantly the price and with the minimum loss. For instance, housing is less liquid than bonds or stocks. This example is easy to perceive, but it is not so easy, when we compare stocks or bonds. Technical and fundamental analysis tools are needed.
On the other hand, volatility reports about the variability of an asset’s price in a certain period. In other words, how far are current prices from its average. The more changes up and down, the more volatile. There are many reasons that alter highly the prices: a crisis, rumours, figures, political or economical decisions. There are some references to measure volatility in stocks indexes: VIX for S&P500, VXN for Nasdaq or VXD for Dow Jones, just to mention some of a long list.
Separately, both measures offer the investor some information, but linking both the investor obtains much more. There is an inverse correlation, because a very volatile asset is less liquid. Money exposes to more losses when we play so risky. But the ones who follow markets and use tools to be reported about stocks for trading can get higher revenues profiting from this violent changes in the prices.
This is, for instance, the case of T-Advisor. The suite offers graphical studies about volatility and liquidity of every stock. An investor has available the last 6 years volatility figures and the risk evaluation. It also compares the stock volatility with the main stock indexes as MSCI or Euronext. After having the best information, it is just the investor decision: how risky is your investor’s profile?