The Meaning of Beta

The risk of stocks has a special name in the world of finance--beta. The simplified explanation of beta is that it tells you how the value of a stock moves up and down with an index like the S&P 500. You don't really have to know how it is calculated but knowing the beta for each stock gives you an idea of how risky it is.

If a stock has a beta of 1, it means that its value moves up and down by the same percentage as a market index like the S&P 500 moves up and down. A stock that moves with this index is said to have the same risk as the market. For example, if the S&P 500 index has a value of 5,000 today and moves to 5,500 tomorrow, this represents a 10% increase. If the stock of company XYZ has a beta of 1, you would roughly expect its value to also increase by approximately 10%.

A stock with a beta of 1 is not really considered risky when compared with the overall stock market. A stock with a beta of, say, 2 means that each time the S&P Index moves up by 10% or so, the stock of company XYZ moves up by 2 x 10% = 20%. It also means that this same stock can move down 20% in value as well. So in general, high beta stocks are riskier than low beta stocks. But some people like risk because, even though they can lose a lot of money, they can also win a lot if the market goes their way.

You can find the beta of stocks through financial websites such as Finance.Yahoo.com. By entering a stock symbol, you will get data about the stock price, trading volume, and other  market information. The two images below are the information about General Motors, and News Corporation (the company that owns Fox News and the Wall Street Journal). Note that the beta of General Motors is 1.78 while that of News Corporation is about 1.00.

 



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