Volatility: What's causing it, and who's profiting

Frank Masiello looks at a display showing the ups and downs of Dow Jones Industrial Average during the past week on the floor of the New York Stock Exchange at the closing bell on August 12, 2011.

STEVE CHIOTAKIS: In the past week, I've had to describe what the stock market was doing through all its ups and downs. You've just heard me say big swings, right? I also use the term 'whipsaw,' and 'roller coaster.' Here's what it boils down to, though: the word volatility. And what exactly does volatility mean? And why does it matter?

Here's Marketplace's Adriene Hill.

Adriene Hill: When we talk about volatility, we're talking about the ups and downs.

Mark Sebastian: I like to consider the market kind of like being in a car.

Mark Sebastian is the head of Option Pit Mentoring and Consulting. He says calm markets are kind of like driving on a freshly paved freeway.

Sebastian: This past week has been like driving over the most pothole-filled, crumbly, horrible, rocky road that you could possibly drive over.

All that bouncing around -- that's the volatility in the market. It's risk. Think of it like this:

Charlie Wheelan: Let's suppose I hired you for a job.

Charlie Wheelan teaches at the University of Chicago.

Wheelan: And said, 'Look would you prefer to be paid $50,000 next year for sure? Or would you like it if we flip a coin at the end of the year, and if it's heads you get $100,000, and if it's tails you get nothing?'

He says, both offers average out the same way.

Wheelan: But for someone with a mortgage and tuition payments, the fact that it may come up zero is going to be deeply unsettling.

Short-term traders love volatility because a moving price means there's money to be made buying and selling at the right time. But for the rest of us, the bumpy ride can make planning next to impossible.

Wheelan says volatility in the markets is caused, to a large extent, by all the things we just don't know.

Wheelan: There's just all kinds of fear and uncertainty, nobody really knows where the economy is headed, so we just tend to leap on and magnify the effect of either good news or bad news.

Italy is in trouble -- markets swoon. U.S. consumers bought more stuff -- markets jump. Those are the potholes and rocks. To smooth the road out, Wheelan says, will take figuring out what's going on with the global economy. But it's clarity that might take a while to find.

I'm Adriene Hill for Marketplace.

About the author

Adriene Hill is a senior multimedia reporter for the Marketplace sustainability desk, with a focus on consumer issues and the individual relationship to sustainability and the environment.
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Once again, I come looking for some real insight and get zilcho. Perhaps you guys need to revisit a piece you ran in 2009 by Thomas Geohegan about the real underlying problems with our stock market. It is now the ONLY place for cash to go, cause we don't incent investment monies into the manufacturing sector;rather we incent investors to go and gamble on Wall Street with its mega institutions and computer programmed selling and buying. That is no place for the individual investor or his and/or her retirement funds to be domiciled. And, most definitely not the appropriate place for the ONLY reliable social safety net, Social Security. IMO there's no better proof of how bought so many of our conservative representatives are, when in the face of what happened in 2008 and 2009 there are renewed cries from that quarter about privatizing Social Security. Not a smart or prudent move, from one who had a career in a financial services branch office overseeing what brokers and clients did to their 401-K's and IRA's.

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