The ABC's of Beta - dummies

By Matt Krantz

Beta, or the beta coefficient, is one of those rare market indicators that both fundamental and technical analysts can agree has value. Beta is a statistical measure of how volatile a stock is relative to the stock market at large. Beta is used in the capital asset pricing model used to build a discounted cash flow model.

While beta is based on a somewhat complex statistical technique, as an investor, most of what you need is pretty simple. If an individual stock has a beta of 1, that means it is equally volatile as the general stock market. If beta is less than 1, then the stock tends to swing up and down less than the market. And if a stock’s beta is greater than 1, it is more volatile than the market.

A technical analyst might look at beta to provide clues on how wild to expect a stock’s ups and downs to be — or how closely its moves follow the rest of the market. When an investment’s beta is less than 1, in addition to being less volatile than the market, that might also mean the investment tends to not move in lockstep with the market. If an investment has a beta of 1, that means it’s more volatile than the market — but it might also mean it tends to gyrate with a similar pattern as the market. When an investment moves in lockstep with the market, it is said to be correlated with the market. Beta is available from nearly all financial websites.