Updated on March 7, 2023
Beta is a measure of a stock’s volatility in relation to the overall market. A beta of 1 indicates that the stock’s price will move with the market, while a beta of less than 1 means it is less volatile than the market, and a beta greater than 1 indicates that the stock is more volatile than the market.
For example, if a stock has a beta of 1.5, it is considered to be 50% more volatile than the market. If the market goes up by 10%, the stock is likely to go up by 15%. Similarly, if the market goes down by 10%, the stock is likely to go down by 15%.
How to use Beta in stock trading and investing?
Beta can be used to determine the level of risk associated with a stock. Stocks with high betas are considered to be riskier, but they also have the potential for higher returns. Conversely, stocks with low betas are considered to be less risky but also have the potential for lower returns.
It’s important to note that beta is a historical measure and it’s only representative of the past relationship between a stock and the market. Also, one should consider the underlying business, its market, and its industry to get a better understanding of its future volatility.