Being in stock market, you must have frequently heard about the Beta of say, Stock A is low or Stock B has a high Beta.

Being in stock market, you must have frequently heard about the Beta of say, Stock A is low or Stock B has a high Beta.

So what are they actually referring to by saying this and what is BETA?

Beta is a numerical value that measures the volatility of a stock as compared to the volatility of the market. It is a part of the Capital Asset Pricing Model (CAPM) to calculate the expected return of the stock, a theory used by many practicing analysts and investment managers when analyzing a company or investment
Stock beta is measured by analyzing a stock’s performance in the past in order to evaluate how its price might move in relation to the overall market. It gives a sense of the stock’s risk compared to that of the overall market.

Investment in stocks entails risk.

Every stock has two types of risk embedded in it i.e., systematic risk and unsystematic risk.
Systematic risk is the fluctuation in the returns of stock that occur due to macroeconomic factors. These factors could be the political, social or economic factor that affects the general market, not just a particular industry or stock.

Unsystematic risk is fluctuation in return of a stock arising due to microeconomic factors. These risk factors exist within the company and can be avoided if necessary action is taken.

Beta only takes systematic risk into consideration and not the unsystematic risk, because systematic risk can never be eliminated.
In the stock market, different stocks have different Beta. Beta is also to be looked in relative terms and not in isolation. To give an example, high Beta stocks go up more than the Index when the overall market is bullish and go down more than index when the market is bearish.
The market is considered as the base with a Beta of 1 and individual stocks are measured in terms of how much they deviate from the market.

We can interpret the Beta of stocks in the ways that we will discuss now:

If the Beta value = 1 then it means that the stock moves hand in hand with the market. Adding these stocks in your portfolio may not add up much risk.
If the Beta value is more than 1 then it means that the stock is more volatile than the market. For Example, if the Beta is 1.3 then it means stock can show 30% more swing compared to the market. These are high risk and high return stocks suitable for high-risk appetite investors. Beta of greater than 1 is classified as an aggressive stock.
If the Beta value is less than 1 and greater than 0, then it means the stock is less volatile than the market and will not fluctuate with high volatility. These stocks are less risky and suitable for low-risk appetite investors. Usually the risk averse investors invest in stocks with a beta of less than 1. Beta of less than 1 is classified as a defensive stock

If the Beta value is 0 then it means that the stock is not correlated to the market.
Generally, knowing the Beta of the stock is very important for an investor. This helps the investor to decide whether he wants to go for the riskier stock that is highly correlated with the market, or with a less volatile one.
However there are multiple other factors also which affect the stock price movement and this is just one of the factors and perhaps one of the oldest and widely popular ones among investors