Forex Trading

What Beta Means: Considering a Stock’s Risk

Many platforms, including day trading apps and price checkers, provide charts that show a stock’s price movement over time. You’ll notice up-and-down trends as the stock increases and declines. The same direction applies to the overall market when the average is applied. You don’t need much technical knowledge to calculate stocks beta to guide investment decisions and portfolio creation. However, you will need a basic understanding of reading charts and adding technical indicators like moving averages. It’s time to step up your investment strategy, and the stocks beta is a crucial component.

  1. is an independent, advertising-supported publisher and comparison service.
  2. A beta of “0.00” on Yahoo! Finance means that the stock is either a new issue or doesn’t yet have a beta calculated for it.
  3. There is a need for adequate stock market research and analysis to gauge market sentiment.
  4. For example, if a company issues a strong earnings report, it can move up on a day when the overall market is down.
  5. We often hear the terms alpha and beta when talking about investments.

Contracts for Difference (“CFDs”) are leveraged products and carry a significant risk of loss to your capital. Please ensure you fully understand the risks and seek independent advice.By continuing to use this website you agree to our terms and conditions and privacy policy. High-beta stocks carry more risk, while low-beta stocks have lower risk.

Does low beta mean low volatility?

Using the previous example, you could expect the stock’s price to go up if the S&P 500 goes down and vice versa. Think of comparing the beta of different stocks in the same way you might order food at a restaurant. Moreover, a stock’s level of volatility may change over time as its circumstances change. This makes beta less practical when looking at long-term investments. Finally, add this number back to the risk-free rate of the selected Treasury security.

For example, calculating a bond ETF’s beta using the S&P 500 as the benchmark would not provide much helpful insight for an investor because bonds and stocks are too dissimilar. If the beta is below 1, the stock either has lower volatility than the market, or it’s a volatile asset whose price movements are not highly correlated with the overall market. The price of Treasury bills (T-bills) has a beta lower than 1 because T-bills don’t move in relation to the overall market.

The baseline number for alpha is zero, which indicates that the portfolio or fund is tracking perfectly with the benchmark index. In this case, the investment manager has neither added nor lost any value. Alpha and beta are two of the key measurements used to evaluate the performance of a stock, a fund, or an investment portfolio.

We’ll see the primary limitations of beta and why you shouldn’t place your investment decisions entirely on them. Bonds, ETFs, and cash are other assets you can purchase for your investment. Beta can also help identify potential high-performing stocks for your portfolio. Low-beta stocks fare well during recessions and periods of high interest rates. They are not ideal for bullish seasons, as they drag your profits down.

Many people are not and they opt for investments with low volatility. Others are willing to take on additional risk for the chance of increased rewards. Every investor needs to have a good understanding of their own risk tolerance, and a knowledge of which investments match their risk preferences. Beta is the volatility of a security or portfolio against its benchmark.

Beta is a statistical measure of the volatility of a stock versus the overall market. It’s generally used as both a measure of systematic accurate currency strength meter risk and a performance measure. The beta for a stock describes how much the stock’s price moves compared to the market.

Beta Is Back

For the full year 2023, we forecast Sirius Revenues to be $9.1 billion, up 0.6% y-o-y. Trefis estimates Sirius XM’s Q revenues to be around $2.3 Bil, marginally below the consensus estimate. SIRI revenue growth was flat year-over-year (y-o-y) in its third quarter of 2023 at $2.27 billion. In addition, its subscription revenue came in flat at $1.7 billion, ad revenue was also flat at $460 million, and equipment revenue saw marginal declines y-o-y to $49 million in Q3. But total operating expenses also declined by nearly 6% y-o-y, meaning that operating income jumped 21% to $564 million. In the Sirius XM business, average revenue per user fell slightly to $15.69 from a year-ago $15.72.

Is Low beta good for stocks?

It’s a numerical value that signifies how much a stock price jumps around. The higher the value, the more the company tends to fluctuate in value. Besides, beta offers a clear, quantifiable measure that is easy to work with.

At the end of the trading day, we conclude that “the markets” were up or down. An investor considering buying a particular stock may want to know whether that stock moves up and down just as sharply as stocks in general. It may be inclined to hold its value on a bad day or get stuck in a rut when most stocks are rising. A stock’s beta will change over time because it compares the stock’s return with the returns of the overall market. There is also a chance that a fund manager just got lucky instead of having true alpha.

Stock Broker: Meaning, Purpose, Types, & More

For risk management, you can add high-beta stocks when the market shows positive growth. Conversely, you can opt for low-beta stocks when the market shows negative trends. There is a need for adequate stock market research and analysis to gauge market sentiment.

In recent years, however, a new approach to index investing—smart beta—has started to gain traction among investors. Smart beta refers to an enhanced indexing strategy that seeks to exploit certain performance factors in an attempt to outperform a benchmark index. In this sense, smart beta differs fundamentally from a traditional passive indexing strategy. Generally, if you were investing in a mutual fund or other type of managed investment product, you would seek out managers with a higher alpha. Keep in mind that both alpha and beta are based on historical data. As every investment prospectus warns, past performance is no guarantee of future results.

Granted, for traders looking to buy and sell stocks within short time periods, beta is a fairly good risk metric. However, for investors with long-term horizons, it’s less useful. A beta that is greater than 1.0 indicates that the security’s price is theoretically more volatile than the market. For example, if a stock’s beta is 1.2, it is assumed to be 20% more volatile than the market. Technology stocks and small cap stocks tend to have higher betas than the market benchmark. This indicates that adding the stock to a portfolio will increase the portfolio’s risk, but may also increase its expected return.

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