Stock beta is a metric used to describe the volatility of a stock in relation to the rest of the stock market. Many investors utilize stock beta in order to make important investment decisions and to assess the risk of their portfolio. Here are the basics of stock beta. 

Stock Beta

Stock beta is a tool that is used to show how volatile a stock is. A stock could have provided an investor with an outstanding rate of return over a certain amount of time. However, if the stock is very volatile, the returns of that stock could be given back to the market within a very short period. Therefore, it is important to look not only at the returns of a stock but also at the amount of risk that is being taken on by the investor in order to achieve those gains. Stock beta attempts to put the amount of risk in perspective for an investor and compare that risk to other stocks in the market.

Beta Values

Beta values are calculated by looking at the movements of a stock and then comparing them to a financial index. By looking at how far away from the average a stock price moves, you can tell how volatile a stock is. The beta value of a stock will be somewhere close to 1. If the beta value of the stock is greater than 1, this means that it is more volatile than the rest of the stock market. If the value is less than 1, this means the volatility of the stock is less than the average. 

Risk vs Reward

When you are looking at the beta value of a stock, you have to keep in mind that risk is related to reward. When you want to earn more money from a stock investment, you are most likely going to have to take on a stock with a higher beta. The higher volatility also indicates that the stock could bring in more returns for the investor. Therefore, you could limit your risk by investing in stocks that have low betas, but you are also going to limit your potential returns.

Finding Beta Values

Calculating the beta value of a stock can get very complicated for an individual investor. In order to access beta values of stocks, you can look on any of the prominent financial websites online. Most of them will allow you to access information about the beta value of a stock along with a current stock quote and other information about the price of the stock. 

Comparing

When you are looking at beta values, it is important to keep them in context. You need to compare the value of one stock against the value of another stock in the same industry. This will tell you how risky one company is in relation to another within the same sector.

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