What is a “Beta”?
No, we are not discussing pack dynamics. If I was a late-80s mitovational speaker then maybe I’d break off a little “If you’re not the LEAD DOG…” but as it is we’re in the 2010s and I’m not selling an actualization system.
The “beta” we’re discussing today is a general measure of stock risk. Businessdictionary.computs it thusly:
Measure of the securities-market risk (‘systemic risk’), <beta> is an indicator of the volatility of a stock (or a portfolio of stocks) relative to a benchmark, such as Standards & Poor’s 500 composite index (S&P 500)…
Beta values range from negative values to up around 3 or so. To put beta in perspective, we say that the entuire stock market has a beta of 1. A stock with a beta of 1.25 would be 25% more volatile in its returns than the market average. A stock with a 0.75 beta would be 25% less volatile than the market.
So investors wishing to invest in dependable, conservative securities want stocks with low beta values. Investors wanting to take a risk on higher returns would check out higher-beta stocks. Beyond that, investors with large portfolios might coordinate higher and lower beta values for diversification purposes.
Interestingly, stocks can have negative beta values. That means that they move in the opposite direction of most of the stock market. For example, if a major pawn broker had stock, it might go up when the rest of the market went down. These stocks are referred to as “insurance” because they under-perform in normal conditions but they can guard against general downturns.
