Beta: A measure of stock market volatility

Julie Brownlee, Fsp Invest, 02 Sep. 2014

Tags: beta, volatility, what is beta, measuring stock market volatility, stock market volatility,

When it comes to the up and down movements of share prices and the stock market, it all boils down to volatility.

So how can you measure volatility?

Read on to find out…

What is beta?

Professional investors and those with a firm grasp of numbers can use beta as a way of measuring the risk of a share in comparison to the risk of the stock market as a whole.

Beta is a measure of volatility. In other words, it measures how much a share price moves about over a period of time.

Interpreting beta

Let’s say a share has a beta of one. That means its share price moves in line with the overall stock market.

If a share has a beta of more than one, this means the share is more volatile than the overall market.

On the other hand, if a share has a beta of less than one, this means the share is less volatile than the overall market. Or it can indicate that the share price doesn’t move in the same direction as the market.

Do certain companies have certain beta values?

You tend to find that certain companies have similar beta values.

For example, a utilities or pharmaceutical company generally has a low beta value. Riskier companies, such as those in technology or small, young firms, generally have higher beta values.

How to use beta

Different financial models use beta in order to predict the expected return owning a particular share might generate.

If a share has a higher beta, as an investor you’d expect a higher require to compensate you for holding that share.

When the market gets a bit volatile, many investors move into low beta shares. As they’re less volatile, they tend to provide more protection to your portfolio than more volatile shares.

When the market is climbing or the economy is recovering, investors may move into shares with higher betas.

So there you have it, beta, a measure of stock market volatility.

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