Investing in the stock market seeks to make savings profitable. Investors manage to obtain capital gains from their investment, on the one hand, from the evolution of the market price. That is, they will earn the difference between the sale price and the purchase price. But this difference can also be negative and that the investment entails losing money.
In fact, it is one of the risks that the CNMV, the Spanish financial regulator, warns of: “the main risk of equities is the uncertainty about their returns.” In other words, the value of the shares can go up or down with respect to their acquisition value and it is possible not to achieve the expected return and even lose the entire investment.
When investing, it is essential to know the concept of volatility. It indicates the risk of a security in a period, through the statistical analysis of the historical series of its prices. In this way, volatility makes it possible to assess risk: if a security is very volatile, it is more difficult to predict its behavior, thus incorporating greater uncertainty for the investor. Therefore, the higher the volatility, the higher the risk.
shares without volatility
It must be taken into account that it is difficult to find completely stable actions since economic or geopolitical circumstances may occur that will disappear in the markets. A clear example is what happened at the beginning of the Covid-19 pandemic, when even shares of solid companies registered sharp falls on the stock market.
In the case of stocks, an interesting benchmark is the VIX index, an indicator that shows expected short-term volatility in US financial markets. Specifically, it measures the implied volatility of 30-day to expiration S&P 500 index options.
The IG portal explains that the VIX index is calculated using the SPX index option prices and is expressed as a percentage. Thus, “if the value of the VIX increases, the S&P 500 is likely to fall, while if the value of the VIX decreases, the S&P 500 is likely to remain stable,” they highlight.
Shareholder remuneration
Stable stocks don’t have to be less profitable. Another way to earn money with an investment is shareholder remuneration: cash dividends, dividends paid with shares (scrip), refund of share premiums and capital reduction with refund of contributions. Thus, despite the fact that the price of a company has barely moved -unrelated to external circumstances that cause volatility in the market-, the investment is rewarded in some way.
In the case of cash dividends, it is not an added value for the shareholder, but involves the transfer of part of the value of the company on the stock market to its shareholders, reducing its stock market value. However, for many shareholders it is a factor in deciding where to invest since it ensures a stable income. In addition, from BME, operator of the Spanish stock market, they highlight “its protective effect against inflation”. And one of the main attractions of the Spanish stock market for international investors is the relevance of these payments.
If it is a ‘script dividend’ -flexible dividend- the impact on the firm’s capitalization is the opposite of the cash dividend. In this case, the stock market value of the companies increases with the entry of new shares. The shareholder is remunerated by issuing new shares instead of making a cash payment.
