While researching the stock market have you ever come across the Beta metric and wondered what it is and what does it mean?
From a high level, 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.
So let's say you find a stock that has a beta of 1.0. This means that it has a volatility that is aligned with the volatility of the entire market. Meaning, if the market experiences a big swing up or down, the stock will most likely follow the trend of the market.
Now if you see a stock with a Beta greater than 1.0, you are looking at a stock that is more volatile than the market. Which means, the stock can be a riskier investment than a stock that is at or below a beta of 1.0, and it may not experience the same swings as the overall market. In fact, the big swings could be much larger than what the overall market is experiencing. With this in mind, the further away from 1.0 a stock's beta is the more volatile it is.
Okay what if the beta is less than 1.o but not negative yet? Well if the beta is .01-0.99 means that the stock is less volatile than the stock market and may not experience the same drastic swings that the market experiences. Lastly, if you see a beta that is negative, this means that "the stock trends against the market and most likely will experience price increases as the major indices are dropping in value and vice versa" (William L. Anderson).
Okay now you know what Beta is, what should you do? You should add beta to your toolbox of must use tools when researching stocks to invest in. Beta will help you measure risk in your portfolio.
Remember investing involves risk and you should always do your due diligence prior to investing. This post is meant to inform and not be a guarantee for a stocks performance.