Volatility in the stock market is essential for trading and investing. Excessive volatility can pose risks, so it is important to measure it. There are two ways to measure volatility: historical volatility (HV) and implied volatility (IV) [f28652ac].
HV looks at past data to calculate how much a stock's price has fluctuated. It is calculated as the standard deviation of a stock's past returns over a specific period. Higher standard deviation indicates higher historical volatility and risk [f28652ac].
IV, on the other hand, estimates how volatile a stock or index is expected to be in the future. It is particularly useful for option trading. Implied volatility rises when investors anticipate significant price fluctuations and decreases in calmer times. The VIX Index, also known as the 'fear index,' is a widely used measure of implied volatility [f28652ac].
Both HV and IV are important for making informed investment decisions, and higher historical volatility can bring greater potential returns depending on risk tolerance and goals [f28652ac].