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What is “Beta”? [Stock Market Terms] + Using Beta for Trading Decisions

January 26th, 2016

Hey this is Sasha Evdakov and thanks for joining me here at Tradersfly.com, where I share with you some insight about trading and investing in the stock market.

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.

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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.
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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.
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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.

Beta for the popular stocks

Here, what I've actually took a moment to do is write down the different Betas for different companies. Apple, here as you can see we have a beta of 1.06, so what does that mean? That means that it moves very similar to the stock market especially now that had the stock split and so forth.
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1.06, it's moving relative to how the market is moving in terms of volatility, how violent it's moving.

Proctor and Gamble here is moving at .89 Beta, so that means it's more stable than the market and it moves slower than the market.

Verizon, we have points .67 which means again it's even slower it's more stable than the current market than the way it is. It's moving at a stable pace.

Now if we take a look at these next to these next two, like Netflix and Priceline, they move at a higher beta in the market, so that's 1.44, for Netflix and 1.51 for Priceline, which means that they move about 51 percent or 44 percent more than the market moves in terms of volatility.

Summing-up

In the end what does this mean and what does it do to help you choose stocks, well if you're not a great picker, if you're not looking at technical analysis as much, one of the ways to see how violent a stock moves is to look at this Beta.

Now, when you're looking at the Beta you’re able to see that violence, the violence swings that that stock can have. If you have a portfolio that is extremely volatile, you probably have a lot of Beta.

On the other hand if you want something a little bit more stable you probably want things that have a lower beta. So if you're having wild swings and you're not able to digest those swings emotionally then you may need to get something with less Beta, less volatility or you could trade less shares of course.

However, if you're moving too slow if things are just moving really slow in the markets for you and your stocks and your investments, then you probably have too low of a beta and you want a little more beta so that way you can have more upside swings or more movement in the market whether that’s upside or downside depending if you’re trading long or short.

Now, I personally I don't know your investment style, your risk appetite, your personal plan, your risk tolerance and all those other things along with your goals and retirement strategies, so for you, you might have a higher beta than me or in lower beta than me or higher or lower than someone else that you know.

It's not that important of what type of benefit you have, what's more important is you get the beta that suits your needs. Now on the other hand once you get more comfortable with choosing stocks, once you get a little bit more insight about stocks, how they move how they act, how they behave on a day-to-day basis, you already have an inside feeling, you already have some insight to knowing how they really move on a day-to-day basis.

For instance you will know that Apple moves a lot more than Proctor and Gamble or Verizon, on a typical day today or Netflix lose a lot more than Proctor and Game and Verizon and Apple on a day-to-day basis.

That's just part of just being in the markets and watching those charts on a day-to-day basis, over time you probably won't really need to look at the beta but initially if you’re getting started,' looking at the beta on the chart or on those reports is really helpful and handy when you're just getting started.

Especially if you're looking for kind of a buy-and-hold or longer-term portfolio and gives you a good way to kind of figure out how much risk and volatility you want within your account

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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