A stock beta is an assessment of a stock's tendency to undergo price changes, or its volatility, as well as its potential returns compared to the market in general. It is expressed as a ratio, where a score of one represents performance comparable to a generic market, and returns above or below the market may receive scores greater or lower than one. Trade publications and references may provide stock beta with other information for investors doing research. It is also possible to calculate this number independently, for those comfortable with the regression analysis techniques used to find beta ratios.
Volatility and returns larger than that seen on the open market results in a stock beta of greater than one. Stocks with a beta of 1.25, for example, are more prone to swings than the market used as a benchmark measure. This also means that such stocks can have greater returns than the market average. If a stock has a high beta, this also means that it is a riskier investment. People who bet on the wrong side of the volatility could take losses.
When the value falls between zero and one, the stock is less excitable than the average market. Such stocks can be reliable investments, because they are unlikely to generate losses, but they also won't create significant gains. Low stock beta scores are common for investments like utilities, which tend to plod along with stable prices. They are less reactive to market swings, which can protect investors, but also limits access to windfall earnings caused by sudden fluctuations in value.
Zero scores are possible for stocks that don't appear to move with the market at all. If the stock beta is less than zero, it means that it tends to move in opposition to the market. When market performance goes up, returns stay low, and when market values drop, the stock may generate higher profits than those seen on the open market. Negative stock beta scores are unusual, but do occur with some stocks and other securities, which may be used in a portfolio as a hedge against dramatic financial events. A sudden fall in value for a portfolio as a whole might be offset by the negative beta stock.
Measurements of returns involve the collection of substantial data over time to see how stocks perform, paired against a market like a stock index to measure behaviors. The more data, the more useful the end result. Limited samples can create a skewed beta score, as stocks may experience periods of volatility and unusually high or low returns offset by stability at other times.
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.