First, here’s the quick definition: the beta of a stock is a measure of how volatile its price is compared with the volatility of the average stock in the broader market.
This matters to you, the investor. We’ll get there. Don’t worry.
Volatility is the variance in price from the mean. So if a stock trades at $100 a share and then the next day it trades at $95 and then the next day it trades at $105, it’s swinging by 5% in a short time period. That’s pretty volatile. A range of $99 to $101 is less volatile. If another stock trades at $100 and then the next day, it trades at $90 and then the next day it trades at $110, that’s a really high beta stock. It’s more volatile than the broader market is.
A stock with a beta of 1 has average volatility. A beta of less than 1 isn’t so volatile. A beta of more than 1 is volatile.
So when you saw the market fall 34% from its all-time high in March, as the Coronavirus pandemic struck, you may have noticed that some consumer staples stocks didn’t fall as hard as 34%...and then as the market rebounded by 25% from that point, some consumer staples rebounded by less than 25%.
Consumer staples usually have beta’s of less than 1 — they’re not so volatile. That’s because people always need their household and grocery essentials, so those companies’ revenue streams are far less threatened by the virus, although their revenues have less upside when things are looking up.
Now to see how to use this to your advantage in the market, watch the quick video above.
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