Calculating the daily volatility for any financial instrument provides the investor or trader with a measurement that captures the up and down movement of the instrument through the course of the day's trading session. Knowing a financial instrument's daily volatility gives the investor an assessment of how risky the instrument is. A high level of daily volatility indicates that there is much uncertainty about the price traders are willing to pay for the financial instrument. Investors can use daily volatility to make investment decisions.
Identify the highest and lowest price paid for a financial instrument for a given day's trading session. For example, IBM opens the trading day on the New York Stock Exchange at $122 and trades as high as $124 and and as low as $121.
Subtract the daily high from the daily low, or $124 minus $121, or $3.
Add the daily high to its daily low: $124 + $121 = $245.
Divide the difference ($3) by the sum ($245). Multiply this quotient by one hundred, or [(124 - 121) / (124 + 121)] X 100 = 1.22), or 1.2%.
Pedro Carrasquillo began writing professionally in 2002 while working for the New Jersey state legislature. He coauthored the legislature's annual "Budget Analysis for the Department of Community Affairs" from 2002-07. Carrasquillo holds a Bachelor of Arts in comparative literature from Haverford College as well as a Master of Science in public policy and management from Carnegie Mellon University.