Don't Be Afraid of Volatile Stocks

If you're new to investing, it's easy to get spooked when the market throws you a curve. Sudden upward or downward spikes in a stock's price can leave you ready to sell your shares and head for the hills. But this day-to-day and month-to-month volatility is nothing to fear.

Some companies' shares tend to rise or fall by only a fraction of a percent on most days. But companies with more volatile stock (usually in fast-changing and heavily technology-dependent industries) often see their prices move by a few percentage points each day.

That said, there are always exceptions to these rules. You might reasonably expect a cement company to have a sleepy stock, but Cemex rose 66% in 2005, fell 61% in 2008, and has climbed more than 60% so far this year.

To illustrate how volatile a stock can be, let's look at Starbucks (Nasdaq: SBUX  ) , a company whose stock is a little more volatile than the overall market:

Date

Stock price

Change from Previous Date

Jun. 1992

$0.70

--

Nov. 1992

$1

43%

Jan. 1996

$2

100%

May 1998

$6

200%

Aug. 1998

$4

(33%)

April 1999

$9

125%

Dec. 1999

$6

(33%)

Jan. 2000

$8

33%

Aug. 2002

$10

25%

May 2004

$20

100%

March 2006

$38

90%

Aug. 2007

$28

(26%)

Nov. 2008

$9

(68%)

Sept. 2009

$19

111%

Data: Yahoo! Finance. Prices are split-adjusted.

From the prices alone, you might not think the stock was too volatile. But the percentage changes make it clear that Starbucks' ups and downs were fairly extreme. For instance, the 33% drop between May and August of 1998 might have driven a lot of nerve-rattled investors out of the stock. But less than a year later, the stock had more than doubled. If you bought at $6 in 1998, and held on to the recent price of about $19, you'd have realized an average annual gain of about 11%. Starbucks has trailed the market over the past three and five years, but it's beating it handily over the past decade.

Beta know this metric
Though many Fools find this measure less than meaningful, you can get a quick sense of a stock's volatility by checking its beta. A beta above 1.0 suggests that a stock is more volatile than the overall market; below 1.0, a stock's beta suggests that its ups and downs are less dramatic than average. Check out the beta figures and 10-year average annual return for these familiar companies -- all five-star stocks in our Motley Fool CAPS community:

Company

Beta

10-Year Average Annualized Return

Procter & Gamble (NYSE: PG  )

0.53

3.1%

Activision Blizzard (Nasdaq: ATVI  )

0.54

24.1%

Johnson & Johnson

0.61

4.4%

Philip Morris International (NYSE: PM  )

0.85

N/A*

Valero Energy (NYSE: VLO  )

1.25

14.8%

Chesapeake Energy (NYSE: CHK  )

1.29

24.9%

Arcelor Mittal (NYSE: MT  )

2.01

14.9%

CEMEX

2.28

5.6%

Data: Motley Fool CAPS, Yahoo Finance.
* Spun off from Altria Group.

The big picture
The table above should help you understand that a stock's volatility won't qualify or disqualify it as a great or promising stock. You should place greater emphasis on how well you expect a stock to perform, how quickly you expect it to grow, and how strong its competitive position is.

Expect volatility with your stocks, and don't stress out too much about how much the shares swing up and down. As long as you have faith in the company (based on ongoing research, not just a whim), the company's long-term performance is what counts.

Are you prepared for more market volatility? Rex Moore explains why you need to get ready for a 25% stock market drop.

Longtime Fool contributor Selena Maranjian owns shares of Activision Blizzard, Johnson & Johnson, Chesapeake Energy, Cemex, Starbucks, and Procter & Gamble. Activision Blizzard, Cemex, and Starbucks are Motley Fool Stock Advisor selections. Chesapeake Energy and Starbucks are Motley Fool Inside Value picks. Johnson & Johnson and Procter & Gamble are Motley Fool Income Investor picks. Philip Morris International is a Motley Fool Global Gains selection. The Fool owns shares of Procter & Gamble, Chesapeake Energy, Cemex, and Starbucks. Try any of our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 18, 2009, at 10:46 AM, boogiemunstar wrote:

    This is a very good read. As a new investor. It provided me with quite a bit of insight towards holding and not sweating bullets everytime my stocks drop.

    This article made me money. :D

  • Report this Comment On September 18, 2009, at 10:47 AM, boogiemunstar wrote:

    Sorry my english is not perfect.

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