Beta is a measurement of a stock's price fluctuations, which is often called volatility, and is used by investors to gauge how quickly a stock's price will rise or fall. Because beta is calculated from past returns, it's not considered as reliable a tool to forecast rises in stock prices, and it is more commonly used by options traders. Beta compares the changes in a company's stock returns against the returns of the market as a whole. Online brokerages give investors extensive data on a stock's beta value, and some free financial news websites also show current beta measurements.
Finding Beta Value
The current beta value of a company stock is provided for free by many online financial news services, including Morningstar, Google Finance and Yahoo Finance. Online brokerage services provide more extensive tracking of a company's beta measurements, including historical trends. Beta is sometimes listed under "market data" or other similar headings, as it describes past market performance. A stock with a beta of 1.0 has the same price volatility as the market index, meaning if the market gains, the stock makes gains at the same rate. A stock with a beta of greater than 1.0 is riskier and has greater price fluctuations, while stocks with beta values of less than 1.0 are steadier and generally larger companies.
Examples of Beta
Beta is often measured against the S&P; 500 index. An S&P; 500 stock with a beta of 2.0 produced a 20 percent increase in returns during a period of time when the S&P; 500 Index grew only 10 percent. This same measurement also means the stock would lose 20 percent when the market dropped by only 10 percent. High beta values, including those more than 1.0, are volatile and carry more risk along with greater potential returns. The measurement doesn't distinguish between upward and downward movements. Investing Daily notes that investors try to use stocks with high beta values to quickly recoup their investments after sharp market losses.
Beta values are useful to evaluate stock prices of smaller companies. These small-capitalization stocks are attractive to investors because their price volatility can promise greater returns, but Market Watch recommends only buying small-cap stocks with beta values of less than 1.0. The beta value is also a component of the Capital Asset Pricing Model, which helps investors analyze the risk of an investment and the returns needed to make it profitable.
Day Trading and Options
Beta value is primarily monitored by investors for day trading, options trading and short-term investing, but experts consider it less useful for long-term investing decisions. Because beta measures past performance, it doesn't take into account new information such as economic reports, political developments and market sentiments. A negative beta value investment such as gold will gain value when the market declines. Investors seek negative beta investments as a hedge during down markets.
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