How the Stock Market’s ‘Fear Index’ Works

The volatility index, also known as the VIX, essentially takes a blood pressure reading of the stock market, measuring investor fear.

The VIX may rise when investor concerns are heightened by events such as the Federal Reserve raising interest rates or the Covid-19 pandemic.

“It’s just a single tool that we can actually quantify that [concern]Lindsey Bell, chief money and markets strategist at Ally Financial, told CNBC.

The VIX is a forward-looking index that weights volatility based on S&P 500 options trading.

“It measures implied volatility over the next 30 days, and that’s derived from options activity,” said Jason Snipe, founder and chief investment officer of Odyssey Capital Advisors. “That is the catalyst of what moves [the VIX] In any direction.”

Investors can use the VIX to help them make buying and selling decisions, or they can invest in it indirectly.

“The most important thing is to have a plan for whatever you’re investing in, whether you’re a trader or an investor,” said Tiffany McGhee, chief investment officer and CEO of Pivotal Advisors.

Watch the video above to learn more about how the VIX measures fear, the mechanics behind implied volatility, and why it matters to investors’ portfolios.

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