BETA
What is Beta?
Beta
measures the level of risk, or price volatility of a stock in relation
to the market as represented by the S&P 500. The market beta is
always 1.0, so a stock with a beta of 1.0 means that the stock moves
precisely with the market. When the market rises, the stock will
rise on average to the same degree, and when the market drops, the
stock will drop to the same extent. A beta of more than one indicates
higher risk than the market, while a beta of less than one indicates
lower risk than the market.
For
example, a beta of 0.6 means a stock price is likely to move up
or down only 60% of the market change, but a beta of 1.40 means
the stock is likely to move up or down 40% more than the market.
Some stocks have a negative beta and are inversely correlated with
the market. When the market goes up, they go down, and vice versa.
Each stock writeup in the RightLine Report includes the Beta for
that particular stock.
Many
investors like to have high beta stocks in their portfolios when
they are bullish on the market, because if the market does go up,
then their stocks will go up even faster than the market. If they
become bearish on the market, they then switch to low beta or negative
beta stocks because their portfolios will probably go down less
than the market, and therefore outperform the market.
Many
short-term traders who use the dual tactics of buying long and selling
short tend to prefer high beta stocks regardless of whether the
market is rising or falling. The higher beta stocks produce maximum
price movement as quickly as possible. Keep in mind that although
this method does allow for faster and larger gains, due to the increased
risk, a Risk Control strategy is strongly recommended.
For more topics to grow your "Trading and Investing" knowledge go to
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