VOLATILITY

Stock traders want to buy stocks when their values are low and sell when their values are high. The distinguishing characteristic of stocks is their potential to change in value in ways that can be hard to predict.

A stock that is likely to have great or fast changes in its value is called volatile. Volatility gives stocks the capacity to have high returns if values rise, but it can also make stocks a risky investment if you can't sell them before they fall. Volatility is a major key to investment strategy. Blue chip stocks, a term for the stocks of older, well-established companies with strong track records, tend to have low volatility.

They are likely to pay dividends and to grow steadily, if slowly, in value. Because of their low volatility, you often have to hold these stocks a long time to enjoy large value gains.

Highly volatile stocks—for instance, those of new companies in hot industries—have appeal to short-term investors. They watch for stocks that they think they can buy at low prices and sell relatively soon when the values grow. They have no real way to be sure this will happen, however, so while volatile stocks have the potential for high and fast returns, they also present a greater risk of losing your money.

You now have a good foundation in how stocks work. Let's summarize.