The Fool FAQ

Beta

The Fool FAQ

I keep reading about the "beta" of a stock. What does that mean? Is a high-beta stock better than a low-beta stock?

Beta is a measure of how a particular stock's price moves relative to the market as a whole. It is usually described as a measure of volatility. There are individual stock betas and industry betas.

A beta of one indicates that the stock's price moves exactly with the overall market. For example, if the market goes up 20%, the stock price goes up 20%. Market down 10%, stock down 10%. This is, of course, calculated over a period of months and does not necessarily hold true on a daily basis.

A stock with a beta of more than one is more volatile than the market. If the market goes up, it tends to go up at a greater magnitude (i.e. market goes up 10%, stock goes up 15%). The higher the beta, the more volatile the stock. A beta of less than one indicates that the stock's price is more stable than the market (in general and over a long time period).

A beta for an entire industry would compare how the companies in that industry fare relative to the market. For example, high technology stocks, as a whole, probably have a higher average beta than one. In comparing stocks within an industry, it can be useful to know the industry beta and how a specific company compares to it. For example, if you know that the beta for telecommunications stocks was 1.3 and you found a company in that industry with a beta of 0.8, this would tell you that the company is not only less volatile than the market as a whole, but extremely stable compared to its industry -- which could be good or bad depending on whether you are looking for price stability or rapid price growth.

This is just a brief outline of what beta is and how it is used. For more information, I would have to send you to the library. Look up Capital Asset Pricing Model and Portfolio Management Theory in a good book on long-term investing.