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Stock beta is a measure of a stock’s volatility and potential earnings compared to the broader market, expressed as a ratio. A score above or below one indicates higher or lower returns than the market. High beta stocks are riskier but can earn higher returns, while low beta stocks are more stable but offer limited gains. Negative beta scores are rare but can be used as a hedge against financial events. Performance measurements require substantial data over time to be useful.
A stock beta is an assessment of a stock’s tendency to experience price changes, or its volatility, as well as its potential earnings compared to the broader market. It is expressed as a ratio, where a score of one represents performance comparable to a generic market, and above or below market returns may be scored higher or lower than one. Trade publications and references can provide beta stocks with other information for investors doing research. It is also possible to calculate this number independently, for those who are comfortable with the regression analysis techniques used to find beta ratios.
Volatility and returns higher than those seen in the open market result in a beta of more than one. Stocks with a beta of 1.25, for example, are more prone to changes than the market used as a benchmark. This also means that such stocks may earn higher than the market average. If a stock has a high beta, this also means that it is a riskier investment. People who bet on the wrong side of volatility could suffer losses.
When the value falls between zero and one, the stock is less excitable than the average market. Such stocks can be reliable investments, because they are unlikely to bring losses, but they will not bring significant gains either. Low stock beta scores are common for investments like utilities, which tend to advance along with stable prices. They are less reactive to market swings, which can protect investors, but also limit access to windfall gains caused by sudden fluctuations in value.
Zero scores are possible for stocks that don’t seem to be moving at all with the market. If the stock beta is less than zero, it means that it tends to move in opposition to the market. When market returns rise, returns stay low, and when market values fall, the stock can generate higher gains than seen on the open market. Negative stock beta scores are rare, but they do occur with some stocks and other securities, which can be used in a portfolio as a hedge against dramatic financial events. A sudden drop in the value of a portfolio as a whole could be offset by negative stock beta.
Performance measurements involve collecting substantial data over time to see how stocks are performing, compared to a market such as a stock index to measure behaviors. The more data, the more useful the end result will be. Limited samples can create a skewed beta score, as stocks can experience periods of volatility and unusually high or low returns offset by stability at other times.
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