Volatility 101: An Introduction to Market Volatility
Almost all assets see fluctuations in value over time.
But while price swings are a common phenomenon in most asset classes that exist, they are the most famous in the stock market.
These upward and downward movements in price are known as volatility, which is defined as “a measure of the frequency and severity of price movement in a given market”.
Today’s infographic comes to us from Fisher Investments, and it serves as an introduction to the concept of volatility, along with offering a perspective on volatility’s impact on investments.
Why are certain times more volatile than others?
In the short term, volatility is driven by changes in demand, which is largely related to changes in earnings expectations. These expectations can be affected by:
- Earnings reports
- New economic data
- Company leadership changes
- New innovations
- Herd mentality
- Political changes
- Interest rate changes
- Market sentiment swings
- Other events (economic, political, etc.)
Often the media and investors assign certain narratives to price changes, but the reality is that the stock market is very complex, and has many underlying factors that drive movements.
What ultimately matters for volatility is demand: if stocks move up or down on a given day, we can say definitively that demand for stock was more (or less) than stock supply.
Technically speaking, volatility is a statistical measure of the dispersion of returns for a given security or market index over a specific timeframe.
In other words, two stocks may have the same average rate of return over a year, but one may have daily moves of 1%, while the other may jump around by 5% each day. The latter stock has a higher standard deviation of returns, and thus has higher volatility.
Here’s what you need to know about standard deviation, which is a common measure of volatility:
- Roughly 68% of returns fall within +/-1 standard deviation
- To calculate standard deviation, differences must be squared. This means negative and positive differences are combined
- Standard deviation tells you how likely a particular value is, based on past data
- Standard deviation doesn’t, however, show you the direction of movement
This all gets more interesting as we look at the market as a whole, in which thousands of stocks (each with their own individual volatility) are moving up and down simultaneously.
Now that you can see how volatility plays out with individual stocks, it makes sense that market volatility is the overall volatility from the vast collection of stocks that make up the market.
In the United States, the most watched stock market index is the S&P 500 – a collection of 500 of the largest companies listed in the country. One measure of the volatility of the S&P 500 is the CBOE Volatility Index, or as it is known by its ticker symbol, the VIX.
Volatility and market sentiment in the overall market are important, because humans tend to experience the pain of loss more acutely than the upside of gains – and this can impact short-term decision making in the markets.
Negative price swings in the wider market can be distressful and unnerving for investors, and high volatility does present some challenges:
- Uncertainty in the markets can lead to fear, which can lead investors to make decisions they may otherwise not make
- If certain cashflows are needed at a later date, higher volatility means a greater chance of a shortfall
- Higher volatility also means a wider distribution of possible final portfolio values
That said, volatility also represents a chance of better returns than expected – and for long-term investors that are patient, volatility can help drive outcomes.
Thematic Investing: 3 Key Trends in Cybersecurity
Cyberattacks are becoming more frequent and sophisticated. Here’s what investors need to know about the future of cybersecurity.
Thematic Investing: 3 Key Trends in Cybersecurity
In 2020, the global cost of cybercrime was estimated to be around $945 billion, according to McAfee.
It’s likely even higher today, as multiple sources have recorded an increase in the frequency and sophistication of cyberattacks during the pandemic.
In this infographic from Global X ETFs, we highlight three major trends that are shaping the future of the cybersecurity industry that investors need to know.
Trend 1: Increasing Costs
Research from IBM determined that the average data breach cost businesses $4.2 million in 2021, up from $3.6 million in 2017. The following table breaks this figure into four components:
|Cost Component||Value ($)|
|Cost of lost business||$1.6M|
|Detection and escalation||$1.2M|
|Post breach response||$1.1M|
The greatest cost of a data breach is lost business, which results from system downtimes, reputational losses, and lost customers. Second is detection and escalation, including investigative activities, audit services, and communications to stakeholders.
Post breach response includes costs such as legal expenditures, issuing new accounts or credit cards (in the case of financial institutions), and other monitoring services. Lastly, notification refers to the cost of notifying regulators, stakeholders, and other third parties.
To stay ahead of these rising costs, businesses are placing more emphasis on cybersecurity. For example, Microsoft announced in September 2021 that it would quadruple its cybersecurity investments to $20 billion over the next five years.
Trend 2: Remote Work Opens New Vulnerabilities
According to IBM, companies that rely more on remote work experience greater losses from data breaches. For companies where 81 to 100% of employees were remote, the average cost of a data breach was $5.5 million (2021). This dropped to $3.7 million for companies that had under 10% of employees working from home.
A major reason for this gap is that work-from-home setups are typically less secure. Phishing attacks surged in 2021, taking advantage of the fact that many employees access corporate systems through their personal devices.
|Type of Attack||Number of attacks in 2020||Number of attacks in 2021||Growth (%)|
As detected by Trend Micro’s Cloud App Security.
Spam phishing refers to “fake” emails that trick users by impersonating company management. They can include malicious links that download ransomware onto the users device. Credential phishing is similar in concept, though the goal is to steal a person’s account credentials.
A tactic you may have seen before is the Amazon scam, where senders impersonate Amazon and convince users to update their payment methods. This strategy could also be used to gain access to a company’s internal systems.
Trend 3: AI Can Reduce the Cost of a Data Breach
AI-based cybersecurity can detect and respond to cyberattacks without any human intervention. When fully deployed, IBM measured a 20% reduction in the time it takes to identify and contain a breach. It also resulted in cost savings upwards of 60%.
A prominent user of AI-based cybersecurity is Google, which uses machine learning to detect phishing attacks within Gmail.
Machine learning helps Gmail block spam and phishing messages from showing up in your inbox with over 99.9% accuracy. This is huge, given that 50-70% of messages that Gmail receives are spam.
– Andy Wen, Google
As cybercrime escalates, Acumen Research and Consulting believes the market for AI-based security solutions will reach $134 billion by 2030, up from $15 billion in 2021.
Introducing the Global X Cybersecurity ETF
The Global X Cybersecurity ETF (Ticker: BUG) seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Cybersecurity Index. See below for industry and country-level breakdowns, as of June 2022.
|Sector (By security type)||Weight|
|🇰🇷 South Korea||0.9%|
Totals may not equal 100% due to rounding.
Investors can use this passively managed solution to gain exposure to the rising adoption of cybersecurity technologies.
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