What is β Beta?
Beta (β) is a way to measure how much a stock’s price moves compared to the overall stock market, and it helps us understand how risky or “bouncy” that stock might be.
If a stock has a beta of 1, it usually moves up or down about the same as the market does; if its beta is higher than 1, it’s more volatile, meaning it tends to go up and down more than the market, and if it’s less than 1, it’s more stable and doesn’t move as much.
Beta is important because it helps investors decide how much risk they’re taking when they add a stock to their portfolio. For example, if you want steady, less risky investments, you might look for stocks with a low beta, but if you’re okay with bigger ups and downs for a chance at higher returns, you might choose stocks with a higher beta.
By mixing stocks with a range of betas, you can tailor your portfolio’s risk level to match your own comfort with market ups and downs, potentially maximizing returns while reducing the impact of market swings. For example, adding low-beta stocks can help cushion your portfolio during market downturns, while high-beta stocks might boost returns during strong markets.