Most investments don’t steadily gain money day after day or year after year. Instead, they may rise in price at some times and fall in price at others.
Volatility describes how much an investment zigzags in price—or how extreme its price swings are.
Higher volatility investments show stronger, more dramatic price swings. That also makes them higher risk. However, higher volatility investments often have higher returns potential.
Lower volatility investments show smoother returns and smaller price swings, which makes them lower risk. But lower volatility investments tend to have lower returns potential.
Here’s how some of the major types of investments rank in terms of volatility:
- Cash and savings accounts are very low volatility, because they don’t bounce in value.
- Bonds can rise or fall in price, making them more volatile than cash. But they’re much less volatile than stocks and riskier investments.
- Stocks can at times show big price swings up or down, making them a higher volatility investment.
- And cryptocurrency can take wild price swings almost overnight, making it one of the most volatile investment types around.