What does volatility indicate in financial markets?

Volatility is a key concept in financial markets that measures the degree of variation in a security's price over a specific period of time. High volatility indicates a significant price fluctuation, while low volatility signifies more stable prices. Understanding volatility is crucial for investors, as it helps gauge risk and potential returns. Investors often utilize volatility to assess whether they can expect sharp price increases or decreases, which can influence trading decisions and portfolio management strategies.

The other choices do not accurately reflect the concept of volatility. For instance, stating that a security's market price always increases misrepresents how prices can fluctuate in various market conditions. Similarly, suggesting that volatility guarantees investment returns fails to recognize that higher volatility can correspond with both higher risks and potential losses. Lastly, while investor confidence can be reflected in market movements, it is not synonymous with volatility itself.