Investing Information

Investing 101: Risk Terminology - BETA

About thirty years ago, statisticians armed with all of theirstatistical theories began to confront the financial markets. Ahandful of useful tools emerged that the average investor shouldbe familiar with when they look to purchase stocks.

One secret that people "in the know" use is "BETA". "Beta" isa number which reflects how volatile a stock has been relativeto the market. This number is also quoted on most quotationservices so it is easy to get to, but I have often found that itis never defined. A BETA of 1.00 means that on average, a stockhas traditionally matched the markets swings both on the upsideand on the downside. A BETA greater than 1.00 reflects aboveaverage market volatility, and a BETA of less than 1.00indicates below average market volatility. When a BETA is lessthan zero it indicates that the stock moves contrary to thegeneral market, going down in bull markets and rising in bearmarkets.. It used to be the case that Gold mining stocks wouldhave negative betas. Internet stocks for example have very highbetas.

Many of the analysts that cross your TV screen and makerecommendations use BETA as their primary screening device insearching for suitable investments. So the next time yourbroker calls with an investment recommendation, ask him what theBETA is and then relish the silence on the other end of thephone. Then send him a copy of this article!

-Harald Anderson

Harald Anderson is the founder and Chief Analyst of a leading online resource of Options Trading Information. He writes regularly for financial publications on Risk Management and Trading Strategies. His goal in life is to become the kind of person that his dog already thinks he is.


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