Beta is another measure of volatility that gives an investor an idea of how risky a stock is likely to be.
It is used to compare the risk of a particular stock against the risk of the whole market (i.e. a market index). Luckily, beta is quite an easy concept to understand.
As a standard, the market as a whole has a beta that is equal to 1. It represents the level of volatility that an investor would be exposed to, if they just invested into a market index fund.
Unlike the market, stocks can have a beta that is either higher than 1, less than 1, or equal to 1. If an investment has a beta of 1, it means that it has the same level of risk as the market – therefore, if the market increase, the stock will increase by a very similar amount.
If a stock has a beta that is higher than 1, it means that it is more volatile than the market. For example, if a stock has a beta of 1.5, then it means that when the market increases by 10%, the stock should increase by around 15%.
Equally, if a stock has a beta that is less than 1, it makes it less volatile than the market. For instance, a beta of 0.5, then it means that when the market increases by around 10%, the stock would increase by around 5%.
Thankfully, there is no need to know how to calculate beta as it is easy to find. If you look for a stock on a website like Google or Yahoo Finance, the beta of the stock will be given.