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.