As a numeric value, it is used to measure the fluctuation of a stock against changes happening in the stock market. Beta is also defined as a systematic risk measure of a security in comparison to the market.
The value is commonly used in capital asset pricing model. It helps to determine the expected return of a security and market returns.
It is known to represent the tendency of a stock return in response to market swings. The value is usually calculated by dividing the covariance of the security’s return and the benchmarks return by the variance of a benchmark’s return within a particular period of time.
Interpretation of Beta
In trading, a beta of 1 has been found to indicate that the price of a security is moving with the market while having less than 1 translates to a less volatile market.
On other hand, a beta that is greater than 1 helps to show that the security’s price is more volatile than the market. It is common for several technology companies to have it higher than 1 especially on NASDAQ.
For a negative beta, this helps to show an inverse relation to the market. Majority of investors believe that gold should be having negative betas. This is because they tend to do better in case the stock market declines. Problem is this has not proven to be true.
With this indicator, investors and traders are able to find securities that meet one’s specification. That is why it’s highly advisable to invest in securities with low betas for example treasury bills.
It is common to find traders or investors willing to take on more risk. In this case, the best securities to invest in are those with higher betas.
How to locate the beta value
Brokerage firms are known to calculate these values which are usually published on their site. The book provides estimates of betas for different publicly traded companies.
Problem is traders and investors don’t have access to the beta book. Furthermore, the calculations used can be quite confusing. The good news is that both beginners and experienced traders can have access to the beta value of any publicly traded company.
All one has to do is navigate to Yahoo Finance, search for any publicly traded company for example Apple Inc. Click on Statistics and navigate to stock price history which is under trading information. The beta value is listed at the top.
As a trader or investor, it is important to have a good understanding of your risk tolerance. Furthermore, one should learn which securities match their risk criteria.
As a result, traders and investors are able to gain rewards as well as minimize risks. The only way to achieve the above is to use the beta value.