Beta - A measure of Volatility!!!

Stock beta calculation measures a stock’s volatility, the degree to which its price sways and moves as related to the overall market. In other words, it can measure the risk of a particular investment and/or sector in relationship to the current market (Nifty in this case) conditions.

Here are some pointers:

Beta less than 0 - which would indicate an inverse relation to the market - is possible but highly unlikely.

Beta equal to 0 - Cash has a beta of 0. In other words, regardless of which way the market moves, the value of cash remains unchanged (ignoring inflation and stuff !).

Beta between 0 and 1 - Stocks with volatilities lower than the market have a beta of less than 1.

Beta of 1 - A beta of 1 represents the volatility of the given index used to represent the overall market, against which other stocks and their betas are measured. The S&P Nifty is such an index. If a stock has a beta of one, it will move the same amount and direction as the index. So, any stock that mirrors Nifty will have a beta close to 1.

Beta greater than 1 – This denotes highly volatile stocks. They tend to move more than the movement in Index.

And why looking at Beta might help ya?

Beta coefficient is tool which can be used for selecting momentum stock picks for momentum day trading strategies. If Beta value for stock is 1 it means that such stock will make similar moves as markets will do. If it is 2 or 3 then you can expect that such stock is making large intraday moves. It’s also a good tool when choosing stocks to balance your portfolio choosing the aggressive and the passive (safe).

And why ONLY looking at Beta might not help ya?

While Beta seems to be a good measure of risk, there are some problems with relying on beta scores alone for determining the risk of an investment.

Beta looks backward and is not predictive (remember it’s just a tool!).

Beta also doesn’t account for changes that are taking place.

Beta suggests a stock’s price volatility relative to the whole market, doesn’t predict the direction, that volatility can be upward as well as downward movement.

Some additional reading on beta! Here and here!