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Highlights
- Beta is a measurement of stock market risk or volatility which shows how a stock price moves up or down relative to the overall market.
- Beta of more than 1 shows that the stock price is more volatile.
- Beta of less than 1 indicates that the share price is less volatile than the overall market.
Beta is a measurement of stock market risk or volatility which shows how a stock price moves up or down relative to the overall market. While beta of more than 1 shows that the stock price is more volatile, beta of less than 1 indicates that the share price is less volatile than the overall market. Beta of 1 means that the stock price is in line with the overall market.
To put it in simple words, beta provides a hint about how much a stock is risky for investors against the overall market. The statistical measure is employed by investors and traders to compare a stock's market risk to that of other stocks.
Beta is calculated using regression analysis. For instance, a firm has a beta of 2. It implies that the stock of the company is double as volatile as the overall market. In such a case, the stock price may surge by 40% if the market is expected to rise by 20%. Similarly, the company may see a loss of 12% if the overall market falls by 6%.
Image Source: Beta is a measurement of stock market risk or volatility. Copyright © Neerazstockseller | Megapixl.com
Here are different beta levels
Negative beta: A stock with beta less than 0 means it has an inverse relation to the market. Generally, it is considered unlikely to happen.
Zero beta: No matter where the market moves, the value of cash doesn’t change.
Between 0 and 1: Beta between 0 and 1 is seen in companies that are less volatile than the overall market.
Beta of 1: The stock moves in the same direction as the market or index.
Beta more than 1: Stocks with volatility greater than the market or index.
Image Source: US dollars. Copyright © Littlemacproductions | Megapixl.com
Beta’s importance to investors
The level of risk associated with a specific stock helps investors to take buying decisions based on their risk appetite. Risk-prone investors generally avoid high beta stocks and are happy to park their hard-earned money into utility stocks and Treasury bills. Several brokerage firms publish beta measurements for different stocks in their reports on a regular basis.
Bottom Line
Investors should keep in mind that beta is a historical measure of the volatility of a stock. While beta can indicate the pattern so far, it can't predict what's expected in the future.
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