Important for stock and mutual fund investors: What is Beta?The experienced stock and mutual fund investors take decision on investing in stock and in equity mutual fund schemes based on various ratios. Beta is one such important ratio. In this thread, I am trying to explain Beta for the purpose of new/inexperienced stock/equity mutual fund investors:-
(a) Beta is a ratio which measures the systematic risk of a stock. Systematic risk is caused by various factors which influence the entire market. Systematic risk is not stock/industry/sector-specific.
(b) The numerical value of Beta is calculated by dividing the price volatility of a stock by the market index. Beta has no unit.
(c) The Beta value of 1 indicates that the particular stock's price moves along with the market. Beta of less than 1 indicates that the stock is less volatile than the market and Beta value of more than 1 indicates that the specific stock is more volatile than the market.
(d) The low-Beta stocks give less profit in upwardly-moving market, but make less loss in downwardly-moving market. Conversely, the high-Beta stocks give more profit in upwardly-moving market and make more loss (than the market) in downwardly-moving market.