Why are stocks so volatile?

A trader reacts to bad news on the floor of the New York Stock Exchange.

TEXT OF STORY

Kai Ryssdal: Listen, here's what I think we ought to do. Only open the New York Stock Exchange from 3 (p.m.) to 4 (p.m.) Eastern time. Once again today the last hour was decisive. The Dow Industrials picked up almost 700 points in the final 60 minutes of trading today.

We used to be able to end this broadcast by saying the Dow was up or down half a percent, or maybe a whole percent on an especially crazy day.
In fact every day this month but two, the Dow has seen triple-digit moves up or down.
And investor jitters aren't the only reason for what the experts like to call volatility. From New York, Ashley Milne-Tyte has today's installment of our explainer series the Marketplace Decoder.


Ashley Milne-Tyte:
Let's go to another kind of market.

Man: 'Ere we go! Bit o' top quality 'ere now.

Back in my hometown of London, purveyors of fruit and veg do everything they can to out shout each other as they fight for customers. That keeps prices low. Art Hogan is chief market analyst at Jefferies and Company. He says say you went to a local market and wanted to buy apples.

Art Hogan: If you have, you know, 25 or 30 farmers standing there the price is gonna be in a pretty tight range. Because there's gonna be a lot of offerings and there's competition.

He's talking about trading volume. The number of apples that are bought and sold.
Reduce the number of farmers by half, he says, and there'll be a far narrower range of apple prices. Which means customers are less likely to get a good deal.

Hogan: That's exactly what happens in the stock market. The more participants you have, the higher the volume is, the less volatility you have. And the fewer participants you have, the fewer buyers and sellers that would minimize changes in price, the more volatility you're gonna have.

The stock market's volatile now because loads of investors have pulled out. So there are far fewer shares to trade. And fewer people to buy or sell. So when trades do happen they can cause much bigger moves in stock prices than usual. Trader Mike McCarthy knows what that feels like. He says on a normal day he can buy or sell a hundred thousand shares of a particular stock in a tight range.

Mike McCarthy: Down a dime, down $0.15 or something like that. And now in this more volatile time you'll get that same order, sell a hundred thousand shares of something, and you'll find yourself knocking the stock down, you know, a dollar or two.

It goes the other way too, and just as dramatically. Just look at what happened today.

In New York, I'm Ashley Milne-Tyte for Marketplace.

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