What is volatility? Risk and reward explained
What you'll learn
Understand risk, reward and volatility - why prices move and why that is normal.
Risk and reward are two sides of the same coin: the chance of higher growth comes with bigger ups and downs along the way. Volatility is the name for those swings, and for a long-term investor it is normal, not a warning sign.
Why prices move
A share or fund is repriced constantly as buyers and sellers change their minds about the future. News, results, interest rates and the wider mood all feed in. The result is a price that wobbles day to day, even when nothing is wrong.
| Holding type | Typical swings | Typical long-term growth |
|---|---|---|
| Cash | Tiny | Low |
| Bonds | Moderate | Moderate |
| Shares | Large | Higher |
Risk is the price of reward
Historically, strong long-term growth has tended to come with some bumpiness along the way. The trade-off is generally hard to avoid. The mistake is not the wobble; it is selling in a panic during a dip and locking in the loss.
Two things tame risk without giving up too much reward:
- Time - long horizons let swings even out.
- Spread - holding many things means no single one can sink you.
Key takeaways
- Higher potential reward comes with higher risk; the two travel together.
- Volatility is the size of an investment's swings, and it is normal.
- Prices move constantly as the market reassesses the future.
- Time and a wide spread reduce risk without abandoning growth.
Illustrative only: shows the rough trade-off between lower-risk and higher-risk holdings, not real returns. Numbers are made up to show the idea. Not a forecast.
Frequently asked questions
What is volatility?
Volatility is how much an investment's value swings up and down. Higher volatility means bigger swings in both directions.
Is a falling price always a sign something is wrong?
Not at all. Prices fall and recover constantly. For long-term investors, dips are a normal part of investing, not a failure.
How does risk relate to reward?
Higher potential reward usually comes with higher risk. There is no reliable way to get strong long-term growth with no ups and downs.
General information, not financial advice. The value of investments can fall as well as rise, and figures and rules can change; check the current position before acting.