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When it comes to volatility in the stock market, I like to think of stocks being like dogs that go to the dog park. You have you pack of dogs that all pretty much do the same thing. Let’s call them the Tobi’s. They run around, play with some toys, sniff others dog’s butt’s, the usual. Then you have your older, more calm dogs. Let’s call them the Jake’s. They walk around, mind their own business, and really do their own thing while they are at the park. Finally, we have the crazy dogs, the Marlee’s. These dogs not only play but they steal other dog’s toys and run around at about twice the speed of other dogs at the park. In this article, I’m going to be showing you how you get see who are the Tobi’s, the Jake’s, and the Marlee’s of the market by looking at beta.

 

What is Beta?

 

Beta is simply a measure of volatility of a stock compared to the market as a whole.

A beta of 1 is your Tobi’s

  • A beta of 1 means that the stock should move in the same percentage as the market. This means that if the market is up 10% then this stock will be up 10% as well.

A beta <1 is your Jake’s

  • A beta less than 1 means that the stock is going to be less volatile than the market. For example, a stock with a beta of 0.5 means that it will be 50% less volatile than the rest of the market.

A beta of >1 is your Marlee’s

  • A beta greater than 1 means that the stock sis going to be more volatile than the market. For example, a stock with a beta of 1.5 means that it will be 50% more volatile than the rest of the market.

**A stock with a higher beta is said to be riskier because of its swings but also provides more of a reward than a stock with a lower beta**

How can I see a stock’s beta?

 

A stock’s beta can be found in the “summary” section of most financial websites after you put in a stock’s ticker symbol. If you have a trading platform, then there should be a “fundamental” or “research” section that has the beta information. You can also include beta in stock screeners if you are looking to narrow your search of stocks.

 

Remember, just like any fundamental or technical indicator, beta is not going to be 100% accurate all of the time. It is only meant to be a supplemental tool to help you predict the future movement of a stock.

 

Homework: Look up 3 companies all and find out their current beta. Next look at stock charts compared to the Dow Jones and see how accurate the stock’s beta has been.

3 thoughts on “How Volatile is a Stock I’m about to Invest In?

  1. Hey man. I would say “How have you been,” but it looks like you’re doing great, and that’s awesome. I’m really proud of you. If I wasn’t on active duty, I’d be doing the same exact thing as you (or at least try). Anyway, I checked out your blog just sometime last month and have been following ever since. Really good info that’s broken down into simple terms. I look forward to your future posts as I’m gearing up to pop my options-trading cherry. I’ve been reading, watching webinars, etc., and I’m ready to get in the game. Any personal recommendations on online brokerages/trading platforms? I’m thinking about going with OptionsHouse or TD Ameritrade. I have a Vanguard account, but I’m certainly not going to trade options through them.

    Anyway, thanks for sharing your insight and knowledge. Hope all is well, and I wish you continued success!

    1. Haha hey Troy! Thanks for that man it mean a lot! I hope you have been well too! Trading options is a whole new animal compared to stock trading but the returns can be enormous. It’s good you have been doing so much research. The more you expose yourself to the material the better you will become. I would open up an account with OptionsHouse because they are going to have the cheapest commissions but I would also download TD’s ThinkorSwim platform to help you with your research. Its one of the best trading platforms out there and it is free to use with no account minimums. What I love is that they have a tool on there that allows you to analyze any option trade to see what your profit/loss would be in certain situations. You can input a trade and see how much you would make/loss with in a certain time frame depending on what direction the stock is heading. I use this to assess my risk/reward before going into any option trade. When you download ThinkorSwim there will be an “analyze” tab at the top and from there you will click “+add simulated trade” Once you put in a ticker symbol, the option chains will come up and you can play around with it to see what kinds of returns you can expect. Its awesome.

      Hope this helps but if you have anymore questions feel free to reach out anytime!

      1. Thanks for the tips! I’ll go ahead and download it tonight. In the future, I’ll let you know how I fare. In the meantime, I’m sure I might hit you with another question or two as I continue to follow your blog. Take care man!

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