What is market volatility?

Market volatility describes the intensity and rapidity of price changes of an asset or index. Prices rise and fall sharply over short periods of time in a volatile market, while low volatility means prices are moving in a consistent fashion. 

However, descriptions of volatility alone do not indicate whether the market is going up or down. 

A market can be volatile while rising, perhaps displaying big jumps and pullbacks. 

It can be volatile while falling, with sharp drops and rebounds. 

Or it can remain broadly flat, with lots of choppy movement that nets out.

High market volatility can spook investors, but it is distinct from other periods of market stress. For example, it’s not the same as a market crash. A crash is characterised by a large and sudden fall, while high volatility means frequent and wide swings in price. 

A volatile market is also different from a bear market, which is defined by a sustained decline. 

You can think about it as distinct from long-term performance. It’s often a short-term noise that can obscure long-term trends. But how can you measure it, and how can you handle it?

What causes market volatility, and why is the stock market so volatile?

High stock market volatility can be caused by many factors, but you can often boil down the root causes to:

• Shock: Something unexpected happens and investors scramble to respond, creating erratic movements. An example of this might be surprisingly poor quarterly earnings from an industry-leading tech stock.
• Uncertainty: Things have become unpredictable and investors don’t agree on strategy. For example, investors might have varied options about how to value an emerging industry.
• Forced selling: A significant number of investors need to sell assets, perhaps to meet liquidity needs. Maybe retail investors are pulling their money out of funds, forcing managers to sell assets.

But let’s look at some recent factors that have been causing market volatility around the time of writing (11 February 2026).

• Geopolitics: Tensions between the United States and Iran, as well as both the US and Iran’s seizure of foreign oil tankers, have led to energy and oil price volatility.‍
• Data: US employment data from January was more positive than anticipated, with 130,000 new positions added in the month. However, the report also revised new jobs figures from 2025 down by over 400,000. Some have taken this as a reassuring sign for the US labor market, though other analysts have urged caution.

How is stock market volatility measured?

Measures of stock market volatility include:

• ATR (Average True Range): A range-based calculation which gives an overview of volatility over the last 14 days.
• Intraday range: A simple measure of how much prices swing within a single day. Simply calculated by subtracting the low from the high, or calculating it as a percentage by dividing this figure by the price at market open. 
• Standard deviation: This common measure of historical volatility tells you how much a share price tends to vary from its average over a set period. With a little work, you can calculate this yourself, or use online calculators like this one that measures the standard deviation of returns.

How to calculate volatility yourself with standard deviation

You can fairly simply determine a stock’s volatility by checking how its price differs from the average over a set period of time.

• Find the average stock price during that period by adding the closing price from each day, and dividing it by the number of days. 
• Find the difference between each day’s closing stock price and the average price for the overall period.
• Square each of these, and add them together. Then, divide this figure by the number of days in the period. This figure is called the variance. 
• Find the square root of the variance. This figure is the standard deviation, and indicates how far the stock tended to vary from its regular share price. 

This standard deviation is a common measure of volatility.

So, let’s do an example. Let’s say that over the last five days, Stock X has closed at £15, £17, £16, £19, and £17.

Step 1: Average closing stock price

15+17+16+19+17=84

84/5=16.8

Step 2: Daily difference

Day 1: 16.8-15=1.8

Day 2: 17-16.8=0.2

Day 3: 16.8-16=0.8

Day 4: 19-16.8=2.2

Day 5: 17-16.8=0.2

Step 3: Variance

1.8²=3.24

0.2²=0.04

0.8²=0.64

2.2²=4.84

0.2²=0.04

3.24+0.04+0.64+4.84+0.04=8.8

8.8/5=1.76

Step 4: Standard deviation

√1.76=1.3266499161

This is the standard deviation, and tells you how much the share price has deviated from its average. In this example, Stock X’s share price normally deviates by £1.33.

What is the market volatility index (VIX)?

The market volatility index, or The Chicago Board Options Exchange Volatility Index (VIX) to give its full name, is a gauge of upcoming US stock market volatility. 

It is calculated using S&P500 option prices. 

Options are a derivative that give an investor the right to buy or sell assets at a particular price. An investor might use options when they anticipate major changes in asset prices, with the right to a pre-agreed price acting as a hedge against this percieved volatility. 

When lots of investors want to use options, the price of options climbs and the index rises. This indicates potential upcoming volatility.

How do indexes understate volatility in the equity market?

Indexes average thousands of price moves into one headline number. This means big gains for some stocks can cancel out big losses for others, and the index may finish the day flat despite many sharp swings. 

This effectively let’s volatility go under the radar.

Volatility can also be hidden if an index is dominated by a few stocks with massive market caps. If these heavyweights hold relatively steady, the whole index can look stable even if smaller stocks’ prices are fluctuating.

How to invest in a volatile market

Let’s say a volatile market is upon us. The future is looking uncertain. Nobody has a crystal ball to see what is coming next. 

What course of action can you take as an investor? Here are some practical options:

1. Assess your risk appetite: What is your attitude to risk? What are your needs and wants? Are your goals short or long term? Are you waking up in the dead of night sweating with fear at what’s happening to your portfolio? Answering these questions can identify the right answer for YOU.
2. Stay invested: If you are investing for the long term, don’t have any immediate need for more cash, and your portfolio is diversified, you might consider simply doing nothing. One of the major advantage of regular investment strategies like pound cost averaging are that they can smooth out bumpy market performance over time. If this is part of your strategy, you might stick to it rather than make impulsive changes. 
3. Build buffers: Periods of volatility can deliver consequences that extend beyond your investments fluctuating in value. Your mortgage might become more expensive, or your income may become insecure. Holding cash or cash adjacent investments can ensure you don’t need to sell investments to meet personal finance commitments when the market is at a low.
4. Get defensive: If you still want to invest, but want to cushion the impact of current choppy waters, you might consider defensive sectors. Utilities, healthcare, and consumer staples are traditionally reckoned to provide stability when times are tough. 
5. Spread risk: If your portfolio is not diversified, and you are worried about the impact of volatility, it could be time to broaden your investments. 

If you want more information, check out Freetrade’s top five tips for managing market volatility.

How to manage risk in volatile markets​?

1. Eliminate forced decisions: Reduce the chance of being forced to sell at the wrong time. Think about what kind of emergency buffer you might need.
2. Time horizons: Make sure your investments suit your time horizons. Consider keeping near-term money in cash or high-quality short-term bonds, and reserve equities and other more high-risk investments for longer goals. 
3. Diversification: Spread investments across regions, sectors, and asset classes. Stop a single shock from sinking your portfolio. 
4. Plan ahead: Plan how you might respond to a 10%, 20%, or 30% drop. Think about rebalancing your portfolio and what your tolerance for losses is. 

Where to invest when markets are volatile?

There’s no one place to invest your money when market volatility hits. So, let’s look at different types of assets and consider where and how you might want to invest in them when a volatile market hits:‍

• Exchange-Traded Funds (ETFs): Low-cost ETFs with diversification across different sectors and geographies may protect a portfolio from the impact of volatility. 
• Mutual funds: Similarly, mutual funds can offer a quick route to diversification. You can also quickly identify a level of risk that suits your circumstances, and hand the stress of picking investments off to a fund manager. 
• Cash and cash-like assets: Some investors use cash and cash-like assets, such as money market funds, during periods of volatility. These give you choices, flexibility and liquidity. 
• Commodities: While not the most stable option, some commodities can be used as safe haven assets and others may simply offer portfolio diversification.

For more information, check Freetrade’s guide to how market volatility can affect stock prices.

Market Volatility FAQs

What is a volatile market?

A volatile market is characterised by relatively large price swings in a short period. Prices may be going one direction in the morning, and be the polar opposite by the closing bell. 

How to calculate market volatility​?

When calculating market volatility, you need to examine how much a stock or index’s price differs from its average over a set period of time. As explained earlier in this article, you can do the calculations yourself, or you can use an online calculator. 

Can diversification protect against market volatility?

Diversification can protect you from market volatility, depending on the extent of volatility and the degree of your portfolio’s diversification. Market-wide volatility may still put a dent in a diversified portfolio, but you are less vulnerable than if you had put all your money into a couple of stocks.

Where to invest when markets are volatile?

Some investors choose to ride out dark times by using defensive stocks, cash and near-cash equivalents like money market funds, or high-grade bonds, like gilts. 

Other so-called ‘safe-haven’ assets, like gold, silver, and defensive stocks, can also be popular choices during volatility. 

Of course, some investors will choose to continue with regular investing, trusting that time will smooth any volatility.

Can you invest in the market volatility index?

The market volatility index is often used as an indicator of investor sentiment, and you cannot directly invest in it. However, you can indirectly invest using exchange-traded products (ETPs) such as the WisdomTree S&P 500 VIX 2.25x Acc, which track the index.