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Wednesday, June 25, 2008

What is Beta Value of Stocks?

Beta value is a measure of a stock’s volatility with respect to market volatility. It is a popular indicator used by many traders and investors to facilitate their trades. The market volatility is taken as 1, and beta values of a stock are calculated as a measure of how much the stock price moved from this market volatility.

Beta value of a stock can take one of the following forms.
  1. Negative Beta – This is a rarity, and means the stock is moving just reverse to the market.
  2. Zero (0) Beta – This means the value of the stock stays same irrespective of market movement. Again a rarity.
  3. Beta between 0 and 1 – This means the stock price swing less compared to market movements. Many blue chip company stocks and high-liquidity stocks have beta less than one. In a long-term prospective these stocks fall under low-risk low-profit category.
  4. Beta of 1 – This means the stock price moves in the same relation with the market. This can be the case with many index-related products.
  5. Beta greater than 1 – This means the stock price swings more compared to market movements. Many growing companies and technology companies have beta greater than one. Most of these stocks fall under high-return high-risk category. Also remember, beta at very high levels probably indicates high price volatility because of low-liquidity.
Beta value of stocks is important for traders following Capital Asset Pricing Model (CAPM). Many value investors ignore beta value. Beta values are based on past performances, may not accurate to predict the future, and market volatility and time period of beta are important factors to consider before making a trading decision.

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posted by NobleTrading at 8:37 AM

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