Alpha and Beta in Stock Market:
Investment whether short term or long term will come with two important aspects inherent in it. They are the returns and the risk. When trader invests in any kind of investment there is always the risk element that is not avoidable. This is applicable as well as stock investment. However the level of risk is something that trader could to some extent make a choice. If trader is ready to take up higher risk then trader may invest in such shares that are highly volatile. It’s not necessary that if trader takes up higher risk that will guarantee higher returns. Returns in the form of dividend or price increase to fetch higher profits are something any investor will look for.
The alpha is referring to all those parameters that in a way affect the stock and its performance. Based on this the investor will decide about trader’s investment patterns. In simple terms, alpha is defined as the return on an investment after the adjustment of the risk associated with it. Every stock will have a benchmark and trader gets anything in return which exceeds this mark then that is termed as the alpha. So this mainly used by the investors in order to track the performance of their portfolio. If a security has a good alpha then the investor will preferably invest in them.
The beta of stocks is nothing but the market risks that will affect the stock in several ways. This will measure the stock volatility. Every stock and its price movements related to the total price fluctuations of the market under the Beta. The beta will have either positive or negative values.