Alpha, Beta, Gamma, Delta.
What are we talking about? Fraternities or sororities? Some sort of particle rays? No, we are talking about ways stocks are analyzed.
The more gifted among us mathematically use formulas to analyze and classify the characteristics of a given stock.
How much has it moved historically either up or down? That is a Delta.
However, what we will discuss specifically is what a stock beta calculation is.
Much of Wall Street "jargon" can be confusing and intimidating.
However, most of the underlying concepts behind the jargon are within reach of understanding by the average trader.
Let us start with Beta.
Simply put, Beta represents the likelihood a stock will trade alongside the general market.
What does this mean? Assume the overall market, using usually the Standard and Poors 500 (S&P 500) as a gauge, is up on a given day.
The Beta of a stock predicts the propensity of it to perform in tandem with the overall market.
A low Beta means it is less likely to trade with the market, a high beta means it is very probable it moves with the market.
That is basically a Beta calculation in simple terms.
Let's look at some examples of Beta.
Stocks which have no correlation traditionally with the S&P 500 have very low, or even negative, Betas.
It used to be that many commodity stocks had low Betas.
When the market would do well, people would leave them to buy growth stocks.
When the market did poorly, traders would sell growth and run to the safety of commodities.
This no longer holds universally true.
Many commodity and basic material stocks are now more in line with overall market activity.
An example of something with an exact zero Beta is actual money.
Ponder that.
Does the value of your savings or checking account move with the market? The answer is obviously no.
No matter what the market does, your cash balance is unaffected.
A stock with a Beta calculation of exactly one can be expected to move exactly in lockstep with the rest of the market.
Therefore, if the S&P 500 is up on a given day 2%, it can be expected that given stock will also be up 2%.
No stock even maintains an exact Beta of one moving completely with the market, although some can come very close.
A Beta calculation of over 1 means that the given stock will most probably move more than the overall market itself.
In the above example, the stock might move 2.
5% compared to S&P 500 movement of 2%.
Conversely, this works on the downside as well.
A high Beta stock will tend to fall much faster than the market in that scenario.
You should know what a stock Beta calculation is.
Each of the stocks you own has one.
There are many good resources on the Internet which can be used to look up the Beta of the stocks you own.
This will give you an idea of what kind of volatility to expect within your portfolio should the market go rapidly up, or unfortunately quickly down.
What are we talking about? Fraternities or sororities? Some sort of particle rays? No, we are talking about ways stocks are analyzed.
The more gifted among us mathematically use formulas to analyze and classify the characteristics of a given stock.
How much has it moved historically either up or down? That is a Delta.
However, what we will discuss specifically is what a stock beta calculation is.
Much of Wall Street "jargon" can be confusing and intimidating.
However, most of the underlying concepts behind the jargon are within reach of understanding by the average trader.
Let us start with Beta.
Simply put, Beta represents the likelihood a stock will trade alongside the general market.
What does this mean? Assume the overall market, using usually the Standard and Poors 500 (S&P 500) as a gauge, is up on a given day.
The Beta of a stock predicts the propensity of it to perform in tandem with the overall market.
A low Beta means it is less likely to trade with the market, a high beta means it is very probable it moves with the market.
That is basically a Beta calculation in simple terms.
Let's look at some examples of Beta.
Stocks which have no correlation traditionally with the S&P 500 have very low, or even negative, Betas.
It used to be that many commodity stocks had low Betas.
When the market would do well, people would leave them to buy growth stocks.
When the market did poorly, traders would sell growth and run to the safety of commodities.
This no longer holds universally true.
Many commodity and basic material stocks are now more in line with overall market activity.
An example of something with an exact zero Beta is actual money.
Ponder that.
Does the value of your savings or checking account move with the market? The answer is obviously no.
No matter what the market does, your cash balance is unaffected.
A stock with a Beta calculation of exactly one can be expected to move exactly in lockstep with the rest of the market.
Therefore, if the S&P 500 is up on a given day 2%, it can be expected that given stock will also be up 2%.
No stock even maintains an exact Beta of one moving completely with the market, although some can come very close.
A Beta calculation of over 1 means that the given stock will most probably move more than the overall market itself.
In the above example, the stock might move 2.
5% compared to S&P 500 movement of 2%.
Conversely, this works on the downside as well.
A high Beta stock will tend to fall much faster than the market in that scenario.
You should know what a stock Beta calculation is.
Each of the stocks you own has one.
There are many good resources on the Internet which can be used to look up the Beta of the stocks you own.
This will give you an idea of what kind of volatility to expect within your portfolio should the market go rapidly up, or unfortunately quickly down.
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