By: Julio Perez, Fall 2017 IAC Graduate Research Assistant
A good follow-up subject to liquidity is volatility, since they go hand in hand. Volatility refers to the up-and-down movement of the market, with drastic shifts either up or down in stock reflecting a higher volatility in the market during a defined period in time.
For volatility at a smaller scale, IPOs and tech stock are good examples of potentially volatile stock. After the Great Depression, the American government has tried to minimize the risk of another fatal market collapse caused by volatility through government agencies geared towards monitoring the market, such as the Securities and Exchange Commission (SEC).
Examples of significant restrictions the SEC implemented to restrict volatility are the “Limit Up-Limit Down” mechanism which prevents trades in listed equity securities when triggered by large, sudden price moves in an individual stock, and market-wide “circuit breakers”, which can halt trading or simply close markets if market prices decline to the point of exhausting market liquidity.
Translated: “I know you bought stock of fruit leather at $20 ten minutes ago, but fruit leather is now worth $0.10.”