What is “Beta” [Stock Market Terms] + How to Use it for Trading Decisions
★ SUMMARY ★
In this week’s episode what I’d like to do with you share with you What is Beta and How Can You Use Beta on the Stock Market Tables to make trading decisions or investing decisions for your personal portfolio.
Knowing what Beta is
First off before we even get into what is Beta more important question is why would you want to know this why? Why would you want to know what it’s all about? Well the thing is, what beta really tells you, is it tells you the volatility of a certain stock or security.
How big of those movement, how big not a direction but that how large those movements can be for a stock or security relative to a neutral level. What does all this mean in layman’s terms or in simple terms?
Applying Beta to your stock picks
It means that if you’re looking for a stable company, if you’re for looking for a stock that does not whipsaw around a lot, if you’re looking for a stock that moves in a nice line fashion then you want a smaller beta.
If you want a stock that moves around a lot quicker and has a higher potential to make you more money or has a higher potential to go to the upside quicker or go to the downside quicker, typically great for day trading as well, then you want a higher beta.
An in-depth understanding of Beta in the stock market
Let’s look at beta in more in-depth. Basically, the stock market itself, the market itself has a beta of 1 so if we have the market as a beta of 1, this is how it moves. So let’s just pretend that this angle in this volatility is one.
Stocks that have a higher volatility will have a higher beta so they may have a beta of something like let’s just say one point three and if you have a beta of 1.3, this means typically your 30% more volatile than the market. So that volatility maybe something more like this so that stock has a greater volatility as it’s going up or down.
Now for looking for lower betas, companies like Microsoft or proctor and Gamble, if you’re looking for a beta of let’s say 0.8, this would be 0.8%, that volatility might be something like this, it might be very small and it moves very slow.
It very slow to the upside or the downside, so you’re little bit more stable and that’s why when things are in a panic they sell off very big, people jump to the lower beta stocks, they jump to the ones that have more stability.
On the other hand when things are going great they’ll jump into the higher beta names because that is what they want, they want a huge run to the upside they want the fastest stocks that are moving the quickest in the shortest amount of time.
Posted at: http://tradersfly.com/2016/01/beta-stock-market-terms/
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