Lesson 3.1 · 1 of 5 · Risk and return
What is stock market risk? Volatility explained with real examples
In the stock market, risk means how far the value of an investment can swing, up and down. Volatility measures how big those swings are. A single company swings more than an index of hundreds of firms, and it can lose a large part of its value in a single day.
Terms in this lesson
- Volatility
- How much the price usually goes up and down in a year.
- Maximum drawdown
- The largest fall in price from a peak to the lowest point after it.
- Diversification
- You spread your money across several investments, so one mistake does not hurt too much.
Opening question
Share A rises by 6 to 8% every year. Share B has years of +40% and years of -30%. Which is riskier, in the sense investors use?
In investing, risk means variation first of all: how far and how fast the value can change. B could be down 30% in exactly the year you need the money. A lower return is not the same as higher risk, and a good average does not cancel out the falls along the way.
It does not matter if you get it wrong: trying first helps you remember.
Stock market risk: variation, not just loss
Definition
What does risk mean in the stock market?
How far the value of your investment can drift from what you expect.
Risk is not only “I could lose money”. It is also not knowing where the value will be in a month or a year. Two investments can end up in the same place, but one gets there calmly while the other goes through deep falls on the way.
Two investments start at $1,000 and reach $1,100 after 12 months. Investment A rises in an almost straight line. Investment B swings sharply: it drops to $860 in month 5 and reaches $1,150 in month 10.
Check yourself
On the chart, both investments start at $1,000 and end at $1,100. What does that mean for someone who needed the money in month 5?
Risk shows up along the way, not just at the end. Investment B dropped to $860 in month 5: anyone who sold then lost $140, even though B still finished at $1,100.
What is volatility in a stock
Definition
What is volatility?
How much a price usually rises and falls over a period.
Volatility is measured with the standard deviation: how far returns typically stray from their average. It does not tell you which way the price is heading, only how bumpy the ride is. The S&P 500, an index of 500 large US companies, returned 11.9% a year on average from 1928 to 2025, dividends included, but a typical year landed about 19 percentage points away from that average.
S&P 500 with dividends, 1928-2025.
This is what variation looks like on a real share. Each point is one day’s closing price: up days and down days are mixed together, with no rule you could know in advance.
Apple’s closing share price over the last 90 trading days. Up days and down days alternate, with moves of up to a few percent in a single day.
Myth or fact?
“A highly volatile share is bound to fall sooner or later.”
Myth. Volatility tells you how big the moves are, not which way they go. A volatile share can also rise a long way. The problem is that you cannot know in advance which way the next big move will go.
Work it out
Yesterday a share closed at $200; today it closed at $188. By what percentage did it fall?
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Create a free accountThe risk of a single company
Even very large companies can lose a big chunk of their value in a single day. Three real cases:
On 3 February 2022, after its quarterly results, Meta (Facebook) shares fell by more than 26%. The company lost over $200 billion of stock market value.
On 27 January 2025, Nvidia lost about $589 billion of market value, the largest one-day loss for any company up to then.
In June 2020 the German firm Wirecard admitted that €1.9 billion on its books probably did not exist, and filed for insolvency. Its shares fell close to zero.
Watch out
How often does it happen?
More often than you think: most shares fail to beat even cash.
Hendrik Bessembinder studied every US listed share since 1926. Most of them returned less over their whole life on the market than one-month US Treasury bills. All of the stock market’s net gain came from about 4% of companies. An index of hundreds of firms catches those winners too, which is why diversification is the first line of defence against single-company risk.
Check yourself
You have $10,000. Which option exposes you most to the risk of a single company?
This exercise is in the free account, where we also save your progress.
Create a free accountWhat would you do?
A share you own has dropped 25% in a day after its quarterly results. The rest of the market is up. What do you do?
This exercise is in the free account, where we also save your progress.
Create a free accountWhat you learned
- In the stock market, risk means how far the value can swing, not only the final loss.
- Volatility measures how big the moves are, not which way they go.
- A single company can lose a lot in one day; an index of hundreds of firms spreads that risk.
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Save your progress with a free accountLessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: annual S&P 500 total returns, 1928-2025, from Aswath Damodaran’s dataset (NYU Stern, updated 5 January 2026); Meta, 3 February 2022 (CNN); Nvidia, 27 January 2025 (Bloomberg); Wirecard’s insolvency filing of 25 June 2020 (CNBC); H. Bessembinder, “Do Stocks Outperform Treasury Bills?”, Journal of Financial Economics, 2018. The Apple chart shows the share’s daily closing prices. The first chart is a teaching diagram.