Investing word of the day: Beta

source: http://tiie.com

I always see this word in the analysis of finance websites like Reuters.com and Bloomberg.com but when I searched what is it and what use is it for me Investopedia's video has answered all my questions. So see the video below and learn how you can use Beta in your stock trades.

Oops I know you didn't quite get it so let me explain.

Beta coefficient or simply Beta is a measure of volatility or risk as compared to the market as a whole. Philippine listed stocks are compared to the PSEi to compute their Beta.

In a way it is a multiplier which uses the PSEi as the base comparison.  As the video said it is a way of knowing the movement of the stock as compared to the base it is compared to. Below is the generalized assumption as quoted from Investopedia.com

A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. 

To sum it up:


If Beta is = 1 stock follows the trend of the PSEi
If Beta is > 1 stock is more volatile than the market thus  
                   unpredictable
If Beta is < 1 stock is less volatile than the market thereby slow 
                   moving than the market but stable