Shares of Farfetch Limited (NYSE: FTCH) finished Monday 8% higher than where they began. The stock had spiked as much as 11% higher before settling back down by the end of the session. Typically, a move this big is associated with some sort of fundamental news. That’s not the case for Farfetch today. But here’s why investors shouldn’t be too surprised with this kind of volatility.
In the stock market, all stocks are assigned a beta value. This metric is a measure of volatility — how much it spikes up or down relative to the stability of the market average. For its part, Farfetch has a beta value of about three. The implication is this stock swings about three times wilder than the rest of the market.
In the past year, Farfetch stock has been up about 200%, crushing the market. But along the way, it’s fallen 15% or more five different times before hitting new highs. In short, this is historically a volatile stock and one investors shouldn’t be surprised to see move on little to no news, like it did today.
Volatility is something that can scare investors into selling their favorite stocks. Nobody likes to see a 15% drop. But selling every time stocks drop is often a losing strategy. It locks in losses and causes one to miss out on future upside.
To less fearful investors, volatility can be a great opportunity. If one is picking top companies for the long term, buying more shares at opportune times along the way can boost returns. I’m not necessarily saying Farfetch is one of those top companies; a deeper dive is necessary. But it’s a good reminder that volatility can be leveraged to one’s advantage.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Farfetch Limited. The Motley Fool has a disclosure policy.
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