Volatility index
Also called: VIX, India VIX, Fear gauge · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
A volatility index shows how much the market expects share prices to swing up and down in the near future. India VIX is worked out from the prices of Nifty options. Options are contracts that give the right to buy or sell at a fixed price. When investors are worried, they pay more for options that protect them, so option prices rise and the VIX goes up. That is why it is called the "fear gauge". A low VIX means the market is calm. A high VIX means investors are nervous.
Example
During the COVID crash of March 2020, investors were anxious, option prices jumped, and India VIX rose sharply. When markets settle down, the VIX falls again.
Don't confuse with
- Nifty 50 / Sensex: these track the price level of shares. The VIX tracks how much prices are expected to swing. It often rises when share prices fall.
Related concepts
- Secondary market
- Depository
- Demat account
- Clearing corporation
- T+1 settlement
- Algorithmic trading
- Circuit breaker
- Sensex
- Nifty 50
- Market capitalisation