In investing, beta does not refer to fraternities, product testing or old videocassettes - in investing, beta is a measurement of market riskor volatility. It is because of this risk that some people don't want to invest in stocks. These risk-averse investors can't stomach stocks' greater tendency to fluctuate in price.

Sure, there is always the possibility that a stock will lose some or all of its value, but volatility also makes it possible for investors to make a great deal of money - if they make the right choices. What Is the Beta?

Beta measures a stock's volatility - the degree to which its price fluctuates in relation to the overall market. In other words, it gives a sense of the stock's market risk compared to the greater market. Beta is used also to compare a stock's market risk to that of other stocks. This measure is calculated using regression analysis. A beta of 1 indicates that the security's price tends to move with the market.

A beta greater than 1 indicates that the security's price tends to be more volatile than the market, and a beta less than 1 means it tends to be less volatile than the market. Many utility stocks have a beta of less than 1, and conversely, many high-tech Nasdaq -listed stocks have a beta greater than 1. Essentially, beta expresses the fundamental tradeoff between minimizing risk and maximizing return.

Let's give an illustration.

Say a company has a beta of 2. This means it is two times as volatile as the overall market. If a stock had a beta of 0.

What is Negative Beta? definition and meaning

Why You Should Know What Beta Is Are you prepared to take a loss on your investments? Many people are not and therefore opt for investments with low volatility. Other people are willing to take on additional risk because with it they receive the possibility of increased reward.

It is very important that investors not only have a good understanding of their risk tolerancebut also know which investments match their risk preferences. And, by using beta to measure volatility, you can better choose those securities that meet your criteria for risk. Investors who are very risk averse should put their money into investments with low betas such as utility stocks and Treasury bills. Those investors who are willing to take on more risk may want to invest in stocks with higher betas.

Many brokerage firms calculate the betas of securities they trade and then publish their calculations in a beta book. These books offer estimates of the beta for almost any publicly-traded company. The problem is that most of us don't have access to these brokerage books, and the calculation for beta can often be confusingeven for experienced investors. However, there are other resources. One of the better websites that publishes beta is Yahoo!! Finance enter your company name, then click on Key Statistics and look under Stock Price History.

The beta that is calculated on Yahoo! A beta of "0. Warnings About Beta The most important caveat for using beta to make investment decisions is that beta is a historical measure of a stock's volatility. Past beta figures or historical volatility does not necessarily predict future beta or future volatility.

In other words, if a stock's beta is two right now, there is no guarantee that in a year the beta will be the same.

One study by Gene Fama and Ken French called "The Cross-Section of Expected Stock Returns" published in in the Journal of Finance on the reliability of past beta concluded that for individual stocks past beta is not a good predictor of future beta. An interesting finding in this study is that betas seem to revert back to the mean.

This means that higher betas tend to fall back towards ile można zarobić na giełdzie forex and lower betas tend to rise towards one. The second caveat for using beta is that it is a measure of systematic riskwhich is the risk that the market as a whole faces.

The market index to which a stock is being compared is affected by market-wide risks. So, as beta is found trade forex alertpay comparing the volatility of a stock to vps forex gratis selamanya index, beta only takes into account the effects of market-wide risks on the stock.

The other risks the company faces are firm-specific bbforex, which are not grasped fully in the beta measure. So, while beta will give investors a good idea about how changes in the market affect the stock, it does not look at all the risks the company alone faces.

Number of comparisons in binary search c++ look at an old example. While numbers have changed significantly sincethis illustration still serves its purpose in describing the uses for beta.

The following is a chart of IBM's stock for the trading period of June to June On June 8,the beta for IBM on Yahoo! When the market analysts binary options signals free trial up, IBM red line tended to move up more see the October-to-December rangeand IBM's stock fell more than the market when it declined see the Jan-to-Mar range.

By showing IBM's behavior over this period, this chart demonstrates both the value that comes with countries by stock market capitalization use of beta and the caution that needs to be shown when using it. It helps measure volatilitybut it is not the whole story.

Beta (finance) - Wikipedia

The Bottom Line We hope this has helped shed some light on an often-underestimated financial ratio. Analysts, brokers and planners have used what does negative beta mean in stocks for decades to help them determine the risk level of an investment, and you djibouti stock market be aware of this risk measure in your investment decision-making.

Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam.

Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. Gauging Price Fluctuations By Investopedia Staff Share. Here is a basic guide to various betas: Negative beta - A beta less than 0, which would indicate an inverse relation to the market - is possible but highly unlikely. However, some investors believe that gold and gold stocks should have negative betas because they tended to do better when the stock market declines.

Beta of 0 - Basically, cash has a beta of 0. In other words, regardless of which way the market moves, the value of cash remains unchanged given no inflation.

Beta between 0 and 1 - Companies with volatilities lower than the market have a beta of less than 1 but more than value of call option before expiration. As we mentioned earlier, many utilities fall in this range. Beta of 1 - A beta of 1 represents the volatility of the given index used to represent the overall market, against which other stocks and their betas are measured.

If a stock has a beta of one, it will move the same amount and direction as the index. Beta greater than 1 - This denotes a volatility that is greater than the broad-based index.

Again, as we mentioned above, many technology companies on the Nasdaq have a beta higher than 1. Beta greater than - This is impossible as it essentially denotes a volatility that is times greater than the market. If a stock had a beta ofit would be expected to go to 0 on any decline in the stock market. If you ever see a beta of over on a research site it is usually the result of a statistical error, or the given stock has experienced large swings due to low liquiditysuch as an over-the-counter stock.

For the most part, stocks of well-known companies rarely ever have a beta higher than 4. Beta says something about price risk, but how much does it say about fundamental risk factors? We compare the Beta values obtained from financial sources. Also, how to compute Beta using Excel. In conjunction with stock valuation ratios like the price-to-earnings ratio and the price-to-earnings-growth ratio, a stock's measure of volatility known as beta can help investors build a diversified Beta is a measure of volatility.

Find out what this means and how it affects your portfolio. We explain two methods for calculating the beta of a private company. Examine the theoretical and statistical relationship between beta and volatility to identify three factors that limit beta's explanatory value. Beta is a useful tool for calculating risk, but the formulas provided online aren't specific to you.

Learn how to make your own. Learn how the bet against beta strategy is used by a large hedge fund to profit from a pricing anomaly in the stock market caused by high stock prices. Check out five high-beta stocks that can help make your portfolio more exciting. Low beta may not necessarily mean low risk when it comes to some smart beta strategies. Learn how beta is used to measure risk versus the stock market, and understand how it is calculated and used in the capital Learn about hedging strategies, how to delta and beta hedge a security and the difference between delta hedging and beta Learn how to calculate the beta of an investment using Microsoft Excel.

Negative-Beta Stocks: Worth Buying? -- The Motley Fool

Find out more about beta, what a stock's or portfolio's beta measures, and learn how to calculate a security's or portfolio's Understand the difference between a company's levered beta and unlevered beta. Learn how debt affects a company's levered Learn about some of the quantitative finance measures that investors without a strong math background can use in analyzing An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other.

A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over No thanks, I prefer not making money. Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator. Work With Investopedia About Us Advertise With Us Write For Us Contact Us Careers.

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