What is market volatility & why should you care?

Stock market data

Over the past few weeks, you’ve likely heard people talking about “market volatility” and how we could be entering a “bear market.” If you’ve found yourself scratching your head, wondering what the heck those things mean, then you’ve come to the right place!

Today, we’re talking about the stock market and breaking down everything you need to know about economic factors that could impact your wallet. Let’s start with the basics. 👀

What is an investor?

An investor is someone who puts money into something––like a business––in exchange for a financial return. Ultimately, investors want to minimize their risk (chances of losing money) and maximize their reward (the amount of money they can make on top of the initial investment). The best part: Anyone can be an investor! Now let’s talk about the stock market, and specifically, why people want to invest in it.

What is the stock market & how does it work?

The stock market is a place where lots of investors are able to connect to buy and sell investments––like stocks––which represent shares of ownership in a public company (meaning anyone can buy shares and be a part owner in the business). This includes companies like Apple, Amazon, McDonald’s, Nike, Target, Uber and thousands more. The goal is to buy these shares at a low price and sell them at a high price, so you can make a profit.

Let’s say you buy a share of Nike stock which costs you $130. This price will change constantly as the company makes announcements and puts out new products that consumers may be really excited about, or in some cases, might not like. As a result, you could see the stock price rise to $170 or fall to $120. Ultimately, you’ll want to wait to sell your stock until it’s higher than your original purchase price ($130).

Why do people like investing in the stock market?

The main reason investors love the stock market is because it allows them to grow their money much quicker than things like traditional savings accounts can offer (which have smaller interest earnings). That being said, it’s not without its risks. While you could get lucky and buy Telsa stock right before they announce their newest model, making some fast money, perhaps you purchase McDonald’s stock right before they announce a food contamination issue –– causing the stock price to drop dramatically. This is why it’s really important to have a diversified portfolio, meaning you don’t have all of your eggs (money) in one basket (company).

What other factors can impact the stock market?

Alright, now we’re ready to talk about market volatility and the various things that can cause it. Market volatility is essentially uncertainty which can be caused by a number of things like inflation (overall rise in prices for goods and services), a global pandemic and other world events, resulting in the prices of stock going up and down at a rapid pace.

Going back to our Nike example, say that due to inflation, the cost of Air Jordans 👟 goes up by $50 dollars – causing many consumers not to buy them. As a result, you could see Nike stock fall dramatically. Or, due to the conflict between Russia and the Ukraine, higher gas prices and more transportation obstacles abroad might mean that Nike is producing fewer products. As a result, they may be selling out faster at higher prices, causing a dramatic increase in stock prices (due to a higher product demand with lower supply).

This market volatility also indicates the type of market we are in, which is typically classified as a “bull market” or a “bear market”, meaning that stock prices are consistently going up 👆 or falling down 👇. During a bull market, you’ll see a lot of investors putting money into the markets whereas in a bear market, investors tend to be less confident in the markets – putting more of their money into “safer” investments like bonds, CDs and savings accounts.

There's always some risk when it comes to investing and the stock market. That's why it's so important to learn the basics of money early on, so when you're ready to start investing, you have a solid foundation of how to spend and save smarter. Step gives you the tools to become a financial literacy expert and allows you to get your foot in the door when it comes to putting money towards things you care about.