The intent of stock investment is obviously to make money. However, the US stock market is constantly moving up and down. Some individual stocks move up and down at slow paces, while some are more volatile (like Tesla).
Wouldn’t it be nice if you could get an idea of how a stock will behave before you spend (and potentially lose) money on it? The good thing is that stocks have an indicator called a beta that can offer helpful cues.
What is a beta for stocks and how can it assist you when investing in the stock market? Read on to learn more.
What Is a Beta Value for Stocks?
A beta value measures how volatile a stock is in comparison with the overall market. A volatile stock can go up very high and go down very low as well. While you can make great gains with these stocks, you can also lose a lot of money with them.
The market as a whole has a beta value of 1.0, so a stock’s beta value is determined by how much it varies from this point. Volatile stocks have a value greater than 1.0, while slow-moving stocks have a beta value of less than 1.0. A stock can even have a negative beta value. For example, a value of -1 signifies that the stock moves in the opposite direction of the market.
Where to Find the Beta Value for Stocks
A stock’s beta value is not widely published. Some investment firms may have this information, but for the most part, you may have to do the calculations yourself. Some financial websites offer free beta calculators. You can also use a formula in Excel to make the calculations. Here are the steps to do so:
- Find the weekly prices of the individual stock.
- Find the weekly prices of the market (S&P 500 Index).
- Calculate the stock’s weekly returns.
- Calculate the market’s weekly returns.
- Use the Slope function in Excel. Select the weekly returns of the stock and the market, with each as their own series.
- The output from the Slope function is the beta value.
What Is a Good Beta Value for a Stock?
Whether or not a stock has a “good” beta value depends on what you are looking for in a stock. If you’re risk averse, then look for a stock with a beta value at or below 1.0. If you’re looking for something more exciting, then consider a stock with a value of above 2.0.
Keep in mind that a beta value is just one indicator of stock risk. Beta only works with previous stock prices, so it’s not necessarily a good indicator of the future. Anything can happen.
Company news can affect the stock price, too. Did earnings go down? Did the company change CEOs? These factors can make a stock price plummet, while positive news can make it spike. So don’t use beta values as your only indicators.
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