Beta is the statistical measure of the risk of an investment. Beta is a calculation that compares a stock’s historical performance against the overall performance of the entire stock market. Investors use beta to measure the volatility of any stock. Investment analysts use the Greek letter ‘ß’ to represent beta. Since stocks are characterized by their dynamic nature in terms of rising and falling prices, knowing how volatile a stock is will be extremely valuable. Such knowledge will facilitate your decision making in terms of knowing when to sell and buy a stock. The higher the value of the beta, the higher the volatility of the stock is. If the value of beta is of a low amount than the corresponding increases and decreases in the price of the stock are also of a low value. However, if the economic conditions are unfavorable, then it will be good for the beta to be of a lower amount. On the other hand, if the market is experiencing an upward movement, then a high beta will be beneficial for the investor. As High-beta stocks are supposed to be riskier but provide potential for higher returns. Beta figures can also be used to judge the future trends in the price of the stock.
The market has a beta of 1. If a stock has a beta of greater than 1, the stock is more volatile than the market. Therefore, if the market moves up, the stock will move up more than market. Likewise, if the stock has a beta less than 1, the stock is less volatile than the market. In this case, if the market moves up, the stock may move up but this movement will be lesser than the market movement. If the stock has a beta of 1, it has average market risk and is no more or less volatile than the market. The stock’s returns move 1-to-1 with the market’s returns, meaning if the market moved up 20%, the stock is also likely to have moved up 20%.