Beta

May 05, 2021

A quantitative measure of the volatility of a stock relative to the┬áStandard & Poor’s 500 (S&P 500), generally considered representative of the overall securities market. Specifically, Beta is the performance the stock has experienced in the last 36 or 60 months as the S&P 500 moved 1% up or down. A Beta of 1 indicates the stock’s price will move with the S&P 500. A Beta of less than 1 means it will be less volatile than the S&P 500. Many utilities stocks have a Beta of less than 1. Generally speaking, the higher the Beta, the riskier the investment.

Beta measures volatility, but it does not predict direction. A stock that does 50 percent worse than the S&P 500 and a stock that does 50 percent better than the S&P 500 will both have a high Beta. Therefore, Beta is best used for finding companies that tend to move with the S&P 500, meaning they have Betas closer to 1.