Volatility

Volatility is a way of describing how much a price moves around, regardless of direction. A stock that jumps 5% one day and drops 4% the next is volatile. A stock that inches up or down a fraction of a percent day after day is not, even if it eventually goes just as far.

The common way to put a number on this is to look at a security's returns over some period and calculate their standard deviation, a statistical measure of how spread out the values are around their average. That number is usually scaled, or "annualized," so that stocks with different measurement periods can be compared on the same footing. A higher annualized volatility figure means bigger typical swings; a lower one means calmer, more predictable price action.

There is also a second, forward-looking flavor called implied volatility, which is backed out of options prices rather than calculated from past price history. It reflects what the market is currently pricing in for future movement, and it is a key input into models that estimate what an option should be worth. The historical, backward-looking version is often called realized or statistical volatility to keep the two apart.

The nuance that trips people up: volatility says nothing about direction. A stock can be extremely volatile while trending steadily upward, steadily downward, or going nowhere in a choppy, sideways way. Volatility measures the size and frequency of the moves, not whether they are moves you'd want to be on the right side of.