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What Is Volatility?

Volatility is a statistical metric that gauges the returns dispersion of a specific market index or security. The lower the measure you get, the lower the risks of the market index or security, and vice versa. This metric can be deduced as a variance or standard deviation between the gains of the same market index. 

What Volatility Means In eCommerce

Volatility in eCommerce happens when the cash flow is relatively higher than the accounting revenues for a prolonged period. An excellent illustration of what volatility means in eCommerce can be witnessed in what happened to Amazon in 2020 and part of 2022.

Amazon used the stock-based compensation model to reward its hardworking employees, instead of channeling free Cashflow to cater to this expense. For this reason, Amazon could sustain its growth without the need for external funding because the operational cash flow was technically in excess.

How To Calculate Volatility

As an eCommerce store owner, you should know how to deduce volatility. You can deduce this metric by using variance, as well as standard deviation. After that, you’ll need to get the square root of the variance to get the standard deviation value.

Here is the process of calculating the standard:

  • deduce the mean of your data set;
  • deduce the difference between every data and the mean;
  • square the deviations;
  • deduce the sum of the squared deviations;
  • divide the amount you get above with the number of your data set.

Real-World Example Of Volatility

To put volatility in better context, let’s look at a real-world example. Mr. Einstein is almost retiring and is looking into various retirement investment options. This might include low-volatility stocks that offer steady returns over time. In that case, he can go for either Microsoft Corporation, a company with a beta coefficient of 0.76, or Shopify Inc., a company with a beta coefficient of 1.45.

In the above scenario, Shopify Inc. has a higher volatility than the S&P 500 index, while Microsoft has slightly lower volatility against the same measurement. As a prudent investor, Mr. Einstein will likely choose stocks from Microsoft Corporation over Shopify Inc.

Frequently Asked Questions About Volatility

What is market volatility?

In the broader concept, this business term illustrates the fluctuation, sometimes high unpredictability of price movement. It can be either when the price is falling or rising suddenly.

What is high volatility?

High volatility happens when an operational stock that usually trades at say 1% of its price suddenly starts to trade at the range of 2 to 3% of the same price.

What is historical volatility?

As the name suggests, these measurements show the dispersion of returns for a given stock over a certain period of time.

What is implied volatility?

As a business owner, you should understand what is implied volatility. This includes a prediction of a market, depending on how the stock price will likely move.

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