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What is Stock Beta CalculationPosted by securities on: 2007-01-30 14:55:20
Rob Rens Learn how to protect your money, manage risk and diversify your portfolio by strategically aligning yourself with the market during "Bull Runs" and playing on the other side when the "Bears" take control. What is Stock Beta Calculation? Whether your are an experienced investor or just someone who is trying to put some money away for retirement, know the stock beta in relationship to the current market conditions can minimize risk and assure that you can gauge potential and profitability from investments over a longer period. Stock beta calculation measures a stock's volatility, the degree to which its price sways and moves as related to the overall market. In other words, it can measure the risk of a particular investment and/or sector in relationship to the current market trends/conditions. A Stock Beta Calculation of 1 indicates a strong correlation between an individual stock and the market direction. A Stock Beta Calculation of greater then 1 indicates that the price of the given security tends to move in a manner more volatile then the market. Meanwhile a Stock Beta Calculation of less then 1 means that a stock/security or sector moves in a manner less volatile then the market. Here is a guide to follow: Negative Stock Beta Calculation - A beta less than 0 - which would indicate an inverse relation to the market - is possible but highly unlikely. Some investors used to believe that gold and gold stocks should have negative betas because they tended to do better when the stock market declined, but this hasn't proved to be true over the long term. Stock Beta Calculation of 0 - Basically, cash has a beta of 0. In other words, regardless of which way the market moves, the value of cash remains unchanged (given no inflation). Stock Beta Calculation between 0 and 1 - Companies with volatilities lower than the market have a beta of less than 1 (but more than 0). As we mentioned earlier, many utilities fall in this range. Stock Beta Calculation of 1 - A beta of 1 represents the volatility of the given index used to represent the overall market, against which other stocks and their betas are measured. The S&P 500 is such an index. If a stock has a beta of one, it will move the same amount and direction as the index. So, an index fund that mirrors the S&P 500 will have a beta close to 1. Stock Beta Calculation greater than 1 - This denotes a volatility that is greater than the broad-based index. Again, as we mentioned above, many technology companies on the Nasdaq have a beta higher than 1. Article Written by Dave of Stockhideout.com Best Penny Stocks About the author: Dave of Hot Penny Stocks, and stock message board |
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