Investment 101: Risk Terminology – BETA

About thirty years ago, statisticians armed with all statistical theories began to confront financial markets. There are a number of useful tools that the average investor should be familiar with when they want to buy stocks.

One secret that people “know” is “BETA”. Beta is a measure of how volatile the stock is relative to the market. This number is also included in many quotation services, so it’s easy to get, but I’ve often found that it’s never assigned. 1.00 BETA means that on average, a portion has traditionally adapted to market changes on both the upside and downside. A BETA above 1.00 indicates average market volatility, and a BETA below 1.00 indicates average market volatility. When a BETA is below zero, it indicates that stocks are moving in the opposite direction of the general market, falling in bull markets and rising in bear markets. In the past, Gold Cultural stocks had negative betas. For example, Internet stocks have very high betas.

Many analysts who go over your TV screen and make recommendations use BETA as their primary choice when looking for a suitable investment. So the next time you call an intermediary with an investment recommendation, ask what BETA is and then enjoy the silence on the other side of the phone. Then send him a copy of this article!


-Harald Anderson