Low β – A company with a β that’s lower than 1 is less volatile than the whole market. As an example, consider an electric utility company with a β of 0.45, which would have returned only 45% of what the market returned in a given period. Beta measures the movement of a stock or asset in relation to the market. Low beta generally fxchoice cyrpto broker review means lower price volatiltiy than the average stock. At the same time, many technology stocks are relatively new to the market and thus have insufficient price history to establish a reliable beta. A stock’s beta will change over time because it compares the stock’s return with the returns of the overall market.

But just like anything in the world of investing, it’s never that black-and-white. And past good performance is never a guarantee of continued or greater performance in the future. For example, you may want to avoid a tech company stock that tends to rise and fall below the market frequently.

What is Beta in Stocks? Understanding Beta for Investment Success

He has a qualified MBChB degree and a keen interest in the stock market and the finance industry. His background in the industry has provided him with valuable experience in this field. Awogboro is dedicated to assisting and reaching out to as many people as possible through his writing. In his spare time, he enjoys music, football, traveling, and reading. Beta values above one signify stocks that have outperformed the market in past bullish seasons. Those with values below one represent stocks that have underperformed the market in bullish seasons.

1. High Beta stocks have the potential to generate high returns while low Beta stocks will generate returns more or less in line with the market (or lower).
2. Contracts for Difference (“CFDs”) are leveraged products and carry a significant risk of loss to your capital.
3. For example, a formerly low beta company can overextend itself by borrowing heavily to fund expansion, or it might acquire a firm in a new sector to gain a foothold.
4. SmartAsset Advisors, LLC (“SmartAsset”), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S.
5. For example, if a company issues a strong earnings report, it can move up on a day when the overall market is down.
6. It’s used to evaluate the expected risks and returns of a portfolio, or to see whether a specific investment would be a good fit for a portfolio in terms of expected risks and returns.

We believe everyone should be able to make financial decisions with confidence. It is also commonly referred to as “equity beta” because it is the volatility of an equity based on its capital structure. High β – A company with just2trade review a β that’s greater than 1 is more volatile than the market. For example, a high-risk technology company with a β of 1.75 would have returned 175% of what the market returned in a given period (typically measured weekly).

Market averages add up the prices in an index and divide it by the number of asset units. If you overlay a stock’s price movement with the market average, you’ll notice similarities or differences. The stock’s price can follow the market average closely or loosely, or move oppositely to the market average. A stock with a beta greater than 1 may indicate that it’s more volatile than the market. However, this could also mean it has the potential for stronger returns.

Is the Beta Value of a Stock Important?

Active traders typically look for stocks with higher volatility than the broader stock market to exploit short-term price fluctuations. Scanning for stocks that have a beta above 2 quickly finds suitable trading candidates that move twice as much as the S&P 500 Index. Traders can use sites like Finviz.com that provides a free screener to run a scan. Many consider stocks in the utility sector to have betas less than 1 since they’re not very volatile. Gold, on the other hand, is quite volatile but has tended to move inversely to the market.

The arbitrage pricing theory (APT) has multiple factors in its model and thus requires multiple betas. One way for a stock investor to think about risk is to split it into two categories. The first category is called systematic risk, which is the risk of the entire market declining.

Balancing high-beta and low-beta stocks in a diversified portfolio

Put options and inverse exchange-traded funds are designed to have negative betas. We can see that Micron was 27% more volatile than the market as a whole, while Coca-Cola was 36% less volatile than the broader market. The SPDRs, or SPYs, have a beta of 1.00 because this ETF itself tracks the S&P 500 index.

A negative beta is when an asset moves in the opposite direction of the stock market. An example of this could be gold during economic downturns. The S&P 500’s 500 constituents will each have different betas based on how they moved in relation to the index over a set timeframe. Companies whose share prices were less volatile than the S&P 500 will have a beta value under 1.0. Conversely, share prices that were more volatile than the S&P 500 will have beta values over 1.0.

Why beta is a useful metric for investors in assessing risk

Higher beta stocks also tend to outperform in bull markets when the economy is in expansion mode and confidence is high, whereas lower beta stocks tend to fare better during recessions. To begin, select the “Technical” tab within the “Filters” section. Under the “Beta” tab, select “Over 2” from the dropdown menu.

Beta is a statistical measure of the volatility of a stock versus the overall market. It’s generally used as both a measure of systematic risk and a performance measure. The beta for a stock describes how much the stock’s price moves compared to the market. If a stock has a beta above 1, it’s more volatile than the overall market. For example, if an asset has a beta of 1.3, it’s theoretically 30% more volatile than the market. Stocks generally have a positive beta since they are correlated to the market.

Beta can play a big role in portfolio construction and volatility expectations. For example, you can calculate the weighted average beta of the stocks in your portfolio to get a sense of how volatile you can expect your investments to be on a day-to-day basis. Obviously, stocks move individually, and for a variety of reasons. For example, if a company issues a strong earnings report, it can move up on a day when the overall market is down. But beta just tells us how reactive a stock tends to be when it comes to overall market forces. Here’s a quick reference guide to interpreting a stock’s beta coefficient.

To calculate the beta of a security, the covariance between the return of the security and the return of the market must be known as well as the variance of the market returns. The covariance of the return questrade forex of an asset with the return of the benchmark is divided by the variance of the return of the benchmark over a certain period. The market against which to measure beta is often represented by a stock index.