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What Is a Stock’s Beta, and Is It Even Important?
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What Is a Stock’s Beta, and Is It Even Important?
A stock’s beta is a measure of how volatile that stock is compared with the market. Here’s how to calculate it, how to use it and what it’s good for.
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9 years of experience Expertise Stocks ETFs economic newsSam Taube writes about investing for NerdWallet. He has covered investing and financial news since earning his economics degree from the University of Maryland in 2016. Sam has previously written for Investopedia, Benzinga, Seeking Alpha, Wealth Daily and Investment U, and has worked as an editor for Investment U, Wealth Daily and Haven Investment Letter. He is based in Brooklyn, New York.
Sam Taube writes about investing for NerdWallet. He has covered investing and financial news since earning his economics degree from the University of Maryland in 2016. Sam has previously written for Investopedia, Benzinga, Seeking Alpha, Wealth Daily and Investment U, and has worked as an editor for Investment U, Wealth Daily and Haven Investment Letter. He is based in Brooklyn, New York. Published in Lead Writer + more + more
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She is a graduate of the Maynard Institute's Maynard 200 program, and the National Association of Black Journalists Executive Leadership Academy. She is a two-time winner of the Kansas City Association of Black Journalists' President's Award. She was also founding co-chair of NerdWallet's Nerds of Color employee resource group. Managing Editor + more + moreYou can make almost anything sound smarter by adding Greek letters to it — and investing is no exception.
You can make almost anything sound smarter by adding Greek letters to it — and investing is no exception.When you strip away the fancy terminology, a stock’s beta (β) is simply a measure of how risky that stock is. Beta analysis can be a useful tool for building a balanced portfolio, although it has limitations.
When you strip away the fancy terminology, a stock’s beta (β) is simply a measure of how risky that stock is. Beta analysis can be a useful tool for building a balanced portfolio , although it has limitations.What does beta mean in stocks?
What does beta mean in stocks?Beta is a way of measuring how volatile an investment is, compared with a market index such as the S&P 500. It’s used to evaluate the expected risks and returns of a portfolio, or to see whether a specific investment would be a good fit for a portfolio in terms of expected risks and returns.
Beta is a way of measuring how volatile an investment is, compared with a market index such as the S&P 500 . It’s used to evaluate the expected risks and returns of a portfolio, or to see whether a specific investment would be a good fit for a portfolio in terms of expected risks and returns.A stock with a beta of 1 would be expected to move exactly in sync with its index. If the S&P 500 rose by 1% in a day, then that stock would also rise by 1%. If it fell by 1%, that stock would also fall by 1%.
A stock with a beta of 1 would be expected to move exactly in sync with its index. If the S&P 500 rose by 1% in a day, then that stock would also rise by 1%. If it fell by 1%, that stock would also fall by 1%.If its beta were greater than 1, it would be expected to be more volatile than the index — in other words, bigger increases and decreases. If the S&P 500 rose by 1% in a day, then a stock with a beta of 1.5 would rise by 1.5%. If the index fell by 1%, that stock would fall by 1.5%.
If its beta were greater than 1, it would be expected to be more volatile than the index — in other words, bigger increases and decreases. If the S&P 500 rose by 1% in a day, then a stock with a beta of 1.5 would rise by 1.5%. If the index fell by 1%, that stock would fall by 1.5%.If its beta were less than 1, it would be expected to be less volatile than the index — smaller increases and decreases. So a stock with a beta of 0.7 would rise by 0.7% on a day that the S&P 500 rose 1%, and would fall by 0.7% on a day that the S&P 500 fell 1%.
If its beta were less than 1, it would be expected to be less volatile than the index — smaller increases and decreases. So a stock with a beta of 0.7 would rise by 0.7% on a day that the S&P 500 rose 1%, and would fall by 0.7% on a day that the S&P 500 fell 1%.To see how this looks in the real world, check out the table below. This shows S&P 500 stocks currently with the three highest betas. Data is sourced from Finviz.
To see how this looks in the real world, check out the table below. This shows S&P 500 stocks currently with the three highest betas. Data is sourced from Finviz.Ticker
Ticker
TickerCompany
Company
CompanyBeta
Beta
BetaOne-year performance
One-year performance
One-year performanceCOIN
COINCoinbase Global Inc
Coinbase Global Inc3.7
3.7-23.61%
-23.61%CVNA
CVNACarvana Co
Carvana Co3.56
3.5694.83%
94.83%XYZ
XYZBlock Inc
Block Inc2.67
2.67-26.77%
-26.77%» Improving your research skills? Learn how to read stock charts
» Improving your research skills? » Improving your research skills? » Improving your research skills? Learn how to read stock chartsCash effectively has a beta of zero, because its value has no correlation with any stock market index. Cash doesn’t increase or decrease in value along with the S&P 500.
Cash effectively has a beta of zero, because its value has no correlation with any stock market index. Cash doesn’t increase or decrease in value along with the S&P 500.Some investments — such as put options — have negative betas, meaning that they would be expected to move in the opposite direction of the index. If a put option had a beta of -1.5, it would fall by 1.5% on a day that the S&P 500 rose by 1%, and would rise by 1.5% on a day that the S&P 500 fell by 1%. (For more information, check out our guide to options trading for beginners.)
Some investments — such as put options — have negative betas, meaning that they would be expected to move in the opposite direction of the index. If a put option had a beta of -1.5, it would fall by 1.5% on a day that the S&P 500 rose by 1%, and would rise by 1.5% on a day that the S&P 500 fell by 1%. (For more information, check out our guide to options trading for beginners.)» Learn more: Best online stock brokers
» Learn more: » Learn more: » Learn more: Best online stock brokersBrokerage firms
Brokerage firms
Brokerage firmson Charles Schwab's website
on E*TRADE's website
on Vanguard's website
on Fidelity's website
How to calculate a stock’s beta
How to calculate a stock’s betaA stock’s beta is equal to the covariance of the stock’s returns and its benchmark index’s returns over a particular time period, divided by the variance of the index’s returns over that period.
A stock’s beta is equal to the covariance of the stock’s returns and its benchmark index’s returns over a particular time period, divided by the variance of the index’s returns over that period.As a formula, β = covariance(stock returns, index returns) / variance(index returns).
As a formula, β = covariance(stock returns, index returns) / variance(index returns).If this sounds confusing, don’t worry. You don’t need to do college-level statistical calculations by hand to find a stock’s beta: You could just look it up online
If this sounds confusing, don’t worry. You don’t need to do college-level statistical calculations by hand to find a stock’s beta: You could just look it up onlineMany financial data websites, such as Yahoo Finance and FinViz, will display a stock’s beta along with other metrics, including PE ratio and year-to-date performance if you search the stock’s ticker symbol.
Many financial data websites, such as Yahoo Finance and FinViz, will display a stock’s beta along with other metrics, including PE ratio and year-to-date performance if you search the stock’s ticker symbol.Yahoo Finance’s beta calculations are based on monthly returns over the last five years, while FinViz doesn’t specify the data it uses to calculate beta.
Yahoo Finance’s beta calculations are based on monthly returns over the last five years, while FinViz doesn’t specify the data it uses to calculate beta.What is a good beta for a stock?
What is a good beta for a stock?There is no single answer to the question, “what is a good beta?” It depends on what you’re trying to do within your portfolio and how an investment with a high or low beta will affect it.
There is no single answer to the question, “what is a good beta?” It depends on what you’re trying to do within your portfolio and how an investment with a high or low beta will affect it.If you feel that your portfolio is too conservative or stagnant — that you’re missing out on gains because your investments don’t move very much — then it’s likely that your portfolio as a whole has a beta of less than 1. Adding stocks with a beta greater than 1 would add more volatility relative to the market (and the potential for higher returns).
If you feel that your portfolio is too conservative or stagnant — that you’re missing out on gains because your investments don’t move very much — then it’s likely that your portfolio as a whole has a beta of less than 1. Adding stocks with a beta greater than 1 would add more volatility relative to the market (and the potential for higher returns).Conversely, if you feel that your portfolio is too risky — that you can’t stomach its big upward and downward swings — then there’s a good chance that your portfolio has a beta greater than 1. Adding stocks with betas of less than 1 would help decrease volatility relative to the market.
Conversely, if you feel that your portfolio is too risky — that you can’t stomach its big upward and downward swings — then there’s a good chance that your portfolio has a beta greater than 1. Adding stocks with betas of less than 1 would help decrease volatility relative to the market. Make sense of the markets with The Nerdy Investor A weekly wrap on what's moving markets, plus two monthly deep-dives on how to improve your investing, straight to your inbox. Subscribe for freeLimitations of beta analysis
Limitations of beta analysisBeta analysis can be a useful way to manage the level of risk in your portfolio, but like any financial technique, it’s not perfect.
Beta analysis can be a useful way to manage the level of risk in your portfolio, but like any financial technique, it’s not perfect.One major drawback of beta is that it’s a backward-looking metric. It’s calculated based on past returns, which may not be consistent with future returns.
One major drawback of beta is that it’s a backward-looking metric. It’s calculated based on past returns, which may not be consistent with future returns.For example, if a company with a previously low beta suddenly starts making riskier business decisions and experiencing more dramatic stock price swings, its five-year monthly beta may not increase for several months or even years.
For example, if a company with a previously low beta suddenly starts making riskier business decisions and experiencing more dramatic stock price swings, its five-year monthly beta may not increase for several months or even years.Beta’s backward-facing nature also means it’s not very useful for evaluating younger publicly traded companies without long-term track records.
Beta’s backward-facing nature also means it’s not very useful for evaluating younger publicly traded companies without long-term track records.It’s also worth noting that beta only measures one kind of risk: systematic risk, or how a stock will respond to upturns or downturns in the overall market. It doesn’t include any information on how a company is actually run. Earnings, cash flow, debt and dividends are all important fundamental measures of a company, but none directly affects a stock’s beta.
It’s also worth noting that beta only measures one kind of risk: systematic risk, or how a stock will respond to upturns or downturns in the overall market. It doesn’t include any information on how a company is actually run. Earnings, cash flow, debt and dividends are all important fundamental measures of a company, but none directly affects a stock’s beta.The bottom line on beta
The bottom line on betaLooking at the beta of a portfolio — and the betas of stocks you’re considering adding to that portfolio — can be a useful tool for managing risk, as high-beta stocks tend to increase a portfolio’s overall volatility and low-beta stocks tend to decrease it.
Looking at the beta of a portfolio — and the betas of stocks you’re considering adding to that portfolio — can be a useful tool for managing risk , as high-beta stocks tend to increase a portfolio’s overall volatility and low-beta stocks tend to decrease it.But remember that beta is a backward-looking measure of one specific type of risk. Consider looking at a stock’s fundamentals along with its beta when deciding whether to add it to your portfolio.
But remember that beta is a backward-looking measure of one specific type of risk. Consider looking at a stock’s fundamentals along with its beta when deciding whether to add it to your portfolio. About the author Sam Taube Sam Taube Sam Taube writes about investing for NerdWallet. He has covered investing and financial news since earning his economics degree in 2016. See full bio.Helpful resources
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