Beta measures the volatility of a stock against the market as a whole. When we say volatility we are referencing the swings a company and/or market experience.
Why it's important
Beta theoretically tells an investor how much risk they may experience when investing in an individual stock.
- A beta that is equal to 1.0 means that it has a volatility that is aligned with the volatility of the overall market.
- Beta that is greater than 1.0 means that the observed stock is more volatile than the market and may not experience the same swings as the market. The further from 1.0 the more volatile a security is.
- If a stock has a beta that is less than 1.0, means that the stock is less volatile than the market and may not experience the same drastic swings that the market is experiencing.
- A negative beta means that a stock most likely will experience price increases when major indices drop in value.