The beta measures the volatility of an action relative to the entire stock market over time. A stock with a high beta indicates that it is more volatile than the broader market and can respond to dramatic changes in stock price in the face of market fluctuations. Therefore, if you do not feel like you are undergoing significant price changes, avoid investing in high beta stocks.

<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "But the beta is only". a factor to consider when reviewing This article will help you understand what it means and how you can use it to build a better portfolio that fits your risk tolerance. Financial Advisor can also help you leverage the beta to make better investment decisions. "data-reactid =" 32 "> But beta is just one factor to consider when considering investments – this article will help you understand what it means and how you can use it. build a portfolio that is more responsive to your risk tolerance, a financial advisor can also help you leverage the beta to make better investment decisions.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Understand the beta"data-reactid =" 34 ">Understand the beta

Investors often calculate beta by comparing the price movements of a stock to the movements of a benchmark, such as the S & P 500, over a 12-month period. We will discuss the beta in a few moments. But let's start by understanding why this is important because you can use many free online tools and calculators to calculate it yourself.

<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The beta version is represented by a number based on the beta version analysis, the whole stock market has a beta of 1. And the beta of individual stocks determines the extent to which they are moving away from the broader market. "data-reactid =" 36 "> Beta is represented by a number.Based on beta analysis, the global stock market has a beta of 1. And the beta of individual stocks determines how far they go. Distance from the wider market.

An action with a beta equal to 1 assumes that its price changes with the market. Adding it to your wallet may not add much risk.

An action with a beta greater than 1 may indicate that it is more volatile than the market. However, this could also mean that it could potentially generate better returns. Suppose that your benchmark, or the market to which you are comparing a stock, is the S & P 500. If the stock you're analyzing has a beta of 2, it means that the stock is twice as much volatile than the market. If the S & P 500 increases by 10% next year, you can expect an increase in the stock price of 20%. However, it could fall the same way if the S & P 500 drops by 10%.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "If the stock has a beta version of less than 1, you can conclude that it is less volatile than the overall market, which means that adding it to your portfolio can mitigate risk and contribute to diversify your investments. If the action has a beta below 1, you can conclude that it is less volatile than the entire market. Portfolio can mitigate risk and help diversify your investments.

Beta can also dive below 1 in negative territory. This indicates that the stock can react in the opposite direction of the overall market. Using the previous example, you can expect a rise in the stock price if the S & P 500 falls, and vice versa.

A stock may even have a beta version of zero. This suggests that it acts independently of the global stock market.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Pros and Cons of Beta"data-reactid =" 42 ">Pros and Cons of Beta

<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Understanding Beta can help you make informed decisions about how do you build your investment portfolio. For example, if you have a low tolerance for risk, you may want to focus more on actions with betas greater than zero, but less than or equal to 1. "data-reactid =" 43 "> Understanding version beta can help you improve performance, so if you have low risk tolerance, for example, you may want to focus more on actions with betas greater than zero, but less than or equal to 1.

For example, you may want to avoid the actions of a tech company that tends to go up and down frequently below the market. Essentially, it would have a high beta and would mean more risk.

But as in the world of investments, it's never so black and white. Keep in mind that beta relies on past information. And good past performance is never a guarantee of future or ongoing performance.

As a result, the beta does not help you to deepen the fundamentals of the company that sells the shares. Take the case of a company long considered a safe business with a constant beta. The company then enters a new sector and incurs a large debt over the next few years. The low beta level of the company does not account for this new risk because of the inherent dependence on the calculation of beta on past information.

However, beta can be an important factor in risk quantification if you are the type of investor who buys and sells stocks on a regular basis.

Nevertheless, the beta can be one of the many useful tools when evaluating your investments. It is therefore important to calculate at least the beta of a title you want to buy.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Before calculating the beta"data-reactid =" 49 ">Before calculating the beta

The story continues

Do not forget that beta measures the volatility of the price of a stock compared to a market benchmark. To get the most out of a good beta calculation, this indicator should be as closely related to the stock as possible.

So, if you look at the title of a big American company, the S & P 500 would be a good choice. This market index covers the 500 US companies with the largest market capitalization. But if you look at the title of a more active company abroad, you can use an international market index.

Once again, keep in mind that beta is based on past performance. Decide on a particular amount of time to review. If you are investing for the long term, you may want to consider a period of time of about five to ten years. If you are a trader who buys and sells on a regular basis, consider using a few days or weeks.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Steps to calculate the beta"data-reactid =" 77 ">Steps to calculate the beta

Now that you have this set, let's start doing some calculations. To get started, gather the following:

  • Closing share price for each day of the desired period
  • Daily Closing Level of Your Selected Reference Index During Same Period
  • Calculation software to execute numbers
  • Open the spreadsheet. In the first column, insert the dates for the selected range. In the second column, enter the closing prices of the stock you are considering. And in the third column, insert the closing prices of the index you are using.

    The next step is to calculate the percentage of daily change in stock and index prices. For each entry, subtract the cost price of that day from that of the previous day. Divide the result by the price of the previous day. Multiply by 100. The result is the percentage. This would update your spreadsheet.

    Now, use a covariance formula to compare the price movements of the stock and the index. Divide this covariance result by the index variance only. This allows you to see how stock prices and indices have evolved relative to each other, in relation to the evolution of the price of the index. As a result, you get a beta version.

    Beta = (% daily change in the stock and% daily change in the index) / (% daily change in the index.)

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Take-away"data-reactid =" 87 ">Take-away

    Beta can be a useful measure for determining the price performance of a stock relative to the broader market by looking at past performance. It can also be a useful risk indicator, especially for investors who trade frequently. However, beta has its limits. This does not take into account how companies might undergo major changes in the future, for example. It is also based on previous metrics only. Nevertheless, this is one of many useful factors that you can consider when making investment decisions.

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tips for making better investment decisions & nbsp;"data-reactid =" 109 ">Tips for making better investment decisions

  • Measuring your risk tolerance and building your portfolio can be a difficult task. So we created an asset allocation calculator to help you. It gives you some examples of the appropriate composition of your assets based on your risk tolerance.
  • Whether you are a beginner or you are developing your investment acumen, you can learn the best books for investors.
  • Understanding the beta and all that is involved in selecting the right stocks can be a difficult process. That is why the advice of a financial advisor can prove useful when making investment decisions. To help you, we have developed our interactive tool for matching financial advisors. It connects you to up to three local councilors. You can check their profiles and compare their qualifications before deciding to work with one of them.
  • Photo credit: © iStock.com / fizkes, © iStock.com / Jirapong Manustrong, © iStock.com / Simon Carter Peter Crowther

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