Why Does My Stock Give Me Heartburn?

A fundamental question that nearly all investors have asked at one point or another or even still ask after many years in the market: Why does my stock bounce all over the place? All stocks are volatile to some extent because the overall market is volatile, but some are much moreso than others. Why does this happen?

There is no simple answer to this, but there is a basic framework that drives volatility in individual stocks and it can also be applied to the broader market as well in particular circumstances. The basic framework is along the following lines:

1. Volume levels (What % of shares outstanding trade in a given day?)
2. Earnings certainty (How stable are projected earnings?)
3. Previous volatility (Investor expectations are heavily based on the past. If a stock has been volatile in the past, investors assume it will be volatile in the future and this becomes a self-fulfilling prophecy)

Volume is a major factor for determining the stability of stocks. While low volumes do not necessitate that every day will be an adventure, they do make a stock more vulnerable to large moves. The basic logic is that if a stock only trades 50,000 shares a day, one huge buy order or one huge sell order can have huge sway over the course of the stock because generally there is not enough liquidity to absorb a large spike. However, if, say, a large buy or sell order hits Walmart (WMT), the high level of volume in Walmart shares will moderate that movement and prevent aberrant moves because the market's opinion of where the price of Walmart should be is much more developed than for, say, Consolidated Graphics (CGX). Broadly speaking, this dynamic means that larger companies will be less subject to volatility, but it is slightly more complicated than that. Some large stocks are more volatile than small companies for other reasons, two of which are listed below.