What does Beta measures in Stock Market?
Beta is an important factor in stock market analysis. It measures the correlation of a stock versus an index or the market as a whole. Beta also integrates the volatility of a stock or an entire portfolio, providing valuable data to investors and analysts. Beta indicates either a positive or negative correlation, along with the degree or intensity of the correlation or lack thereof.
Measuring correlation, whether positive or negative, helps investors select, keep or sell individual stocks. Positive correlation indicates that a stock moves with the overall market or the index against which it is measured. Negative correlation advises that an individual stock tends to move opposite the market or the index. When the market moves up, the stock price moves down if it displays negative correlation. This is articulated as a beta of -1. Positive correlation, a stock price increasing as the market increases, or goes down when the market declines, has a beta of 1.
When include the component of volatility, a stock might have a beta greater than 1. Even if the stock has a positive correlation with the market, if it is volatile, with extensive ‘swings’ up or down, investor might spectator a stock with a beta higher than 1. A less volatile security, even when moving with the market, could result in a beta less than 1. A highly volatile stock, with theatrical price changes, that has negative correlation could have a higher negative result.
Beta, measuring correlation and volatility, is neither good nor bad. It does give investors valuable information about individual securities. For example, if trader prefer stocks that move with the Standard & Poor's 500 (S&P 500) and have low volatility, investor can find them. On the Contrary, should trader’s curiosity lie in securities that move opposite market trends, trader will find those factors.
Some stocks are naturally volatile, usually because the corporations, particularly retailers, knowledge frequent revenue peaks and valleys. Other securities tend to sneak, with few theatrical highs or lows. Some stocks authentically follow the market. When the market is up, they are up; when the stock market is down, they are in down trend. Beta measurements use historical data to predict future events. Beta has no inclinations.
The beta bottom line is that it measures risk between a stock and the market. Beta is not infallible. For example, a 1.2 beta for a security indicates that it will move, up or down, 1.2 times the historical market move. Depending on trader’s investment strategy. Beta delivers valuable information about the risk of profit or loss for the investments traders have.