In the world of investing, traders and investors use numerous tools to determine risk within stocks. One of them is known as beta.
Beta is a projection of how much volatility can be expected from a stock. Stocks that have a beta measurement of more than 1 are more volatile than market averages. Stocks with a reading of less than 1 have less volatility than the market.
Beta can tell you in a quick, easy format how risky one stock might be in comparison to one another. This is helpful when assessing how to balance your portfolio for risk.
Video of the Day
One of the biggest factors affecting beta is how it can change over time. This occurs as business expands or pays down debt, causing earnings to rise or fall and affecting the stock price. In the case of beta this will change over time to reflect these changing conditions.
Risk versus Reward
High beta stocks are in the early stages of growth and could see significant returns over the short term.
Beta factors have been known to be backward-looking numbers that could tell you what risks were in the past, not what they will be in the future.
- Jupiterimages/Creatas/Getty Images