Beta Ratio

Source: Investopedia

The beta is a measure of a stock’s price volatility in relation to the rest of the market. In other words, how does the stock’s price move relative to the overall market.

The number is calculated using regression analysis. The whole market, which for this purpose is considered the S&P 500, is assigned a beta of 1. There is no single index used to calculate beta, although the S&P 500 is probably the most common proxy for the market as a whole. 

Stocks that have a beta greater than 1 have greater price volatility than the overall market and are more risky. Stocks with a beta of 1 fluctuate in price at the same rate as the market. Stocks with a beta of less than 1 have less price volatility than the market and are less risky.

How to Use Beta

Investors can find the best use of the beta ratio in short-term decision-making, where price volatility is important. If you are planning to buy and sell within a short period, beta is a good measure of risk. However, as a single predictor of risk for a long-term investor, the beta has too many flaws. Careful consideration of a company’s fundamentals will give you a much better picture of the potential long-term risk.