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Stock price variance gives a person who has bought a stock a rough idea of how much the price of the stock varies with time. This information can be essential in deciding when to enter a stock position and when to close the position. It is also important in estimating the price of stock derivatives like put and call options.
To find the variance in stock price, historical stock prices over a relatively long period of time, usually more than 6 months are required. This can be obtained easily from websites like finance.yahoo.com. The website has extensive databases of historical stock prices of almost all companies. By entering the stock symbol and the duration, historical stock prices can be downloaded as excel sheets or displayed on a web page.
The first step in calculating the stock price variance is determining the average stock price. This is done by adding the stock price of each for the relevant period of time and dividing the sum by the number of days. Once the average stock price has been determined, the difference between the price of each day and the average price has to be calculated. This value can be positive, negative or zero for different day. The difference obtained is then squared and the resulting positive values added together. The sum is then divided by the total number of days of which the prices are being used. This value is the variance of stock price.
Stock price variance is quite important in making decisions in the stock market. A stock that has a high stock price variance is expected to vary in price by a large extent. Here, a person making a loss could expect the the price to rise or fall by a large extent and the subsequent loss made to decrease. The same can be the case with profits being made and if one is making profits it would be wise to close positions as soon as possible.
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