{"id":10153,"date":"2023-10-31T15:46:17","date_gmt":"2023-10-31T10:16:17","guid":{"rendered":"https:\/\/www.tickertape.in\/glossary\/?p=10153"},"modified":"2023-10-31T15:47:24","modified_gmt":"2023-10-31T10:17:24","slug":"beta","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/glossary\/beta\/","title":{"rendered":"Beta &#8211; Definition, Types, Formula and Its Importance"},"content":{"rendered":"\n<p>There is no certainty about the <a href=\"https:\/\/www.tickertape.in\/glossary\/stock\/\">stock<\/a> prices. Feeling the market sentiment, they sometimes go up or fall. Therefore, understanding the <a href=\"https:\/\/www.tickertape.in\/glossary\/volatility-meaning-calculation-importance-and-types\/\">volatility<\/a> risk cannot be avoided while trading in stocks as different stocks have different volatilities. To measure the volatility of a stock investors use Beta.<\/p>\n\n\n\n<p>Before we delve deeper into understanding how to calculate beta, let\u2019s understand the concept of beta in detail.\u00a0\u00a0<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_22 counter-hierarchy counter-numeric\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\">You will Learn About: <\/p>\n<span class=\"ez-toc-title-toggle\"><a class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" style=\"display: none;\"><i class=\"ez-toc-glyphicon ez-toc-icon-toggle\"><\/i><\/a><\/span><\/div>\n<nav><ul class=\"ez-toc-list ez-toc-list-level-1\"><li class=\"ez-toc-page-1 ez-toc-heading-level-2\"><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/glossary\/beta\/#What-is-beta-in-the-stock-market\" title=\"What is beta in the stock market?\">What is beta in the stock market?<\/a><\/li><li class=\"ez-toc-page-1 ez-toc-heading-level-2\"><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/glossary\/beta\/#Beta-All-You-Need-To-Know\" title=\"Beta &#8211; All You Need To Know!\">Beta &#8211; All You Need To Know!<\/a><\/li><li class=\"ez-toc-page-1 ez-toc-heading-level-2\"><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/glossary\/beta\/#How-to-calculate-beta\" title=\"How to calculate beta?\">How to calculate beta?<\/a><\/li><li class=\"ez-toc-page-1 ez-toc-heading-level-2\"><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/glossary\/beta\/#What-are-high-beta-stocks\" title=\"What are high beta stocks?\">What are high beta stocks?<\/a><\/li><li class=\"ez-toc-page-1 ez-toc-heading-level-2\"><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/glossary\/beta\/#What-are-low-beta-stocks\" title=\"What are low beta stocks?\">What are low beta stocks?<\/a><\/li><li class=\"ez-toc-page-1 ez-toc-heading-level-2\"><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/glossary\/beta\/#Other-beta-values\" title=\"Other beta values\">Other beta values<\/a><\/li><li class=\"ez-toc-page-1 ez-toc-heading-level-2\"><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/glossary\/beta\/#Difference-between-Alpha-vs-Beta\" title=\"Difference between Alpha vs Beta\">Difference between Alpha vs Beta<\/a><\/li><li class=\"ez-toc-page-1 ez-toc-heading-level-2\"><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/glossary\/beta\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What-is-beta-in-the-stock-market\"><\/span><strong>What is beta in the stock market?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Beta in the stock market represents a stock\u2019s volatility or systematic risk relative to the volatility of the stock market as a whole. In simpler terms, how a stock moves in relation to the market can be measured through beta.&nbsp;<\/p>\n\n\n\n<p>Beta is used to measure risk and is an important part of the CAPM (<a href=\"https:\/\/www.tickertape.in\/glossary\/what-is-capital-definition-of-capital-types-and-its-importance\/\">Capital<\/a> Asset Pricing Model).<\/p>\n\n\n\n<p>For practical purposes, in India, returns from benchmarks like Nifty are considered when measuring beta as they reflect well the overall performance of the markets. The beta of benchmark indices is typically considered to be 1.0.&nbsp;<\/p>\n\n\n\n<div class=\"wp-block-uagb-advanced-heading uagb-block-03d077b0\"><h2 class=\"uagb-heading-text\"><span class=\"ez-toc-section\" id=\"Beta-All-You-Need-To-Know\"><\/span><strong>Beta &#8211; All You Need To Know!<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2><\/div>\n\n\n\n<ul>\n<li>Beta is used to measure the volatility of a stock in relation to the overall market and its movements.&nbsp;<\/li>\n\n\n\n<li>Beta is a numerical value and can be equal to, greater than, or less than 1. Stocks with a beta value higher than 1 are considered high beta stocks, whereas those with less than 1 are considered low beta stocks.&nbsp;<\/li>\n\n\n\n<li>High beta stocks are more volatile than low beta stocks but can offer good returns. Low beta stocks are more stable in comparison to high beta stocks but may offer low returns.&nbsp;<\/li>\n\n\n\n<li>Alpha and beta are both used to determine the risk and return of an <a href=\"https:\/\/www.tickertape.in\/glossary\/investment-meaning-types-how-to-invest-and-savings-vs-investments\/\">investment<\/a> or stock. However, alpha measures the excess return of a stock over the benchmark, whereas beta measures the movement of a stock in comparison to a benchmark.&nbsp;<\/li>\n<\/ul>\n\n\n\n<h2><span class=\"ez-toc-section\" id=\"How-to-calculate-beta\"><\/span><strong>How to calculate beta?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The beta of a stock can be calculated using a simple formula. The beta formula is as follows \u2013<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full\"><img decoding=\"async\" loading=\"lazy\" width=\"1024\" height=\"461\" src=\"https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/image-5.png\" alt=\"\" class=\"wp-image-10154\" srcset=\"https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/image-5.png 1024w, https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/image-5-300x135.png 300w, https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/image-5-300x135@2x.png 600w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure><\/div>\n\n\n<p><strong>Beta (\u03b2) =<\/strong> <strong>Covariance (Ri, Rm) \/Variance (Rm)<\/strong><\/p>\n\n\n\n<p>Here, Ri is the return from the stock<\/p>\n\n\n\n<p>Rm is the return from the benchmark index\/markets<\/p>\n\n\n\n<p>Covariance of the stock and the markets<\/p>\n\n\n\n<p>Variance of the market<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full\"><img decoding=\"async\" loading=\"lazy\" width=\"291\" height=\"386\" src=\"https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/image-6.png\" alt=\"\" class=\"wp-image-10155\" srcset=\"https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/image-6.png 291w, https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/image-6-226x300.png 226w\" sizes=\"(max-width: 291px) 100vw, 291px\" \/><\/figure><\/div>\n\n\n<p>The beta value of a stock can be greater, lesser, or equal to 1. Here\u2019s how to read these values \u2013<\/p>\n\n\n\n<ul>\n<li><strong>Beta<\/strong><strong> higher than 1<\/strong> \u2013 The stock is more volatile than the market. A slight change in the market indices will cause a considerable shift in stock prices.<\/li>\n\n\n\n<li><strong>Beta<\/strong><strong> lower than 1 <\/strong>\u2013 The stock is less volatile than the market. Any change in the market indices will not result in an equivalent change in the stock prices.<\/li>\n\n\n\n<li><strong>Beta<\/strong><strong> equal to 1 <\/strong>\u2013 The stock shares the same volatility as the overall market. Any change in the market indices will produce an equivalent change in the stock prices.&nbsp;<\/li>\n<\/ul>\n\n\n\n<h2><span class=\"ez-toc-section\" id=\"What-are-high-beta-stocks\"><\/span><strong>What are high beta stocks?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>High beta stocks are those stocks whose beta is more than 1.&nbsp;<\/p>\n\n\n\n<p>These stocks exhibit higher volatility and also have the potential to generate attractive returns in a bullish market.&nbsp;<\/p>\n\n\n\n<p>Investors with higher risk tolerance can benefit from investing in high beta stocks during bull runs. Long-term investors can also benefit from investing in high beta stocks since the short-term volatility is ironed out in the long run.&nbsp;<\/p>\n\n\n\n<p>However, it must be noted that these stocks decline beyond comparison when the markets crash. In other words, high beta stocks carry high risk and volatility and can result in losses if not managed actively.&nbsp;<\/p>\n\n\n\n<p>In retrospect, small-cap and growth stocks generally depict high beta values<\/p>\n\n\n\n<h2><span class=\"ez-toc-section\" id=\"What-are-low-beta-stocks\"><\/span><strong>What are low beta stocks?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Low beta stocks are those that carry a beta value of less than 1.0.&nbsp;<\/p>\n\n\n\n<p>They are less volatile than the market and are generally preferred by risk-averse investors. It is noteworthy that in turbulent markets, low beta stocks show higher stability. i.e., they are less impacted by market volatility.&nbsp;<\/p>\n\n\n\n<p>Usually, large-cap companies have low beta values. Pharmaceutical, FMCG, and automobile stocks are also observed to have lower beta.&nbsp;<\/p>\n\n\n\n<p>If you are looking to add low beta stocks to your investment portfolio, visit <a href=\"https:\/\/www.tickertape.in\/screener\/equity\" target=\"_blank\" data-type=\"URL\" data-id=\"https:\/\/www.tickertape.in\/screener\/equity\" rel=\"noreferrer noopener\">Tickertape Stock Screener<\/a> and add \u2018Beta\u2019 filter to customise your search instantly.<\/p>\n\n\n\n<h2><span class=\"ez-toc-section\" id=\"Other-beta-values\"><\/span>Other beta values<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Besides stocks, there are other market securities whose beta can be calculated. Securities such as <a href=\"https:\/\/www.tickertape.in\/glossary\/mutual-fund-meaning\/\">mutual funds<\/a>, ETFs, etc., can also have beta value higher than, lower than or equal to 1. However, in some cases, the beta can also be 0 or less than 0, i.e., in the negative.&nbsp;<\/p>\n\n\n\n<p>Let\u2019s understand what these two values mean \u2013<\/p>\n\n\n\n<ul>\n<li><strong>Beta<\/strong><strong> equal to 0<\/strong> \u2013 Beta value which is equal to 0 means that the security is not correlated to the stock market. It means that the value of the security will change independently of the stock market\u2019s movements. Common examples include bonds, fixed deposits, and other fixed income saving instruments that are unaffected by stock market movements and, thus, have a beta of 0.<\/li>\n\n\n\n<li><strong>Beta<\/strong><strong> less than 0<\/strong> \u2013 Securities with a negative beta depict an inverse correlation with the stock market. In simpler terms, this means that if the stock market rises, the prices of such securities might fall and vice versa. Gold is a common example of a security whose beta is usually negative. This is because when the stock market experiences considerable volatility and falls, investors consider gold to be a safe haven. They invest in gold to avoid losses from the stock market, and gold prices might then increase with increased demand.&nbsp;<\/li>\n<\/ul>\n\n\n\n<h2><span class=\"ez-toc-section\" id=\"Difference-between-Alpha-vs-Beta\"><\/span>Difference between Alpha vs Beta<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>While beta is an important metric to measure volatility, another metric that is commonly used by investors is called alpha.&nbsp;<\/p>\n\n\n\n<p>Alpha measures the additional\/excess returns a stock or a security yields over and above the benchmark returns. Alpha and beta are both used to analyse<s> <\/s>stocks when measuring their inherent risks and returns. However, both concepts are different.&nbsp;<\/p>\n\n\n\n<p>Here are a comparative analysis of alpha and beta to understand what each means and how one differs from the other \u2013<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Points of difference<\/strong><\/td><td><strong>Alpha&nbsp;<\/strong><\/td><td><strong>Beta<\/strong><strong>&nbsp;<\/strong><\/td><\/tr><tr><td>Meaning&nbsp;<\/td><td>Alpha measures the excess returns delivered by a stock over the benchmark returns.<\/td><td>Beta is a measure of a stock&#8217;s volatility relative to the stock market&#8217;s overall volatility.<\/td><\/tr><tr><td>Value&nbsp;<\/td><td>It is read in percentage form (though it is numerical).<\/td><td>It is expressed in a numerical value<\/td><\/tr><tr><td>Measure&nbsp;<\/td><td>The minimum alpha of a stock can be zero, implying that the stock does not outperform its benchmark&nbsp;<\/td><td>The minimum beta can be below zero for securities that are negatively correlated with the market<\/td><\/tr><tr><td>Calculation formula<\/td><td>Alpha is calculated by deducting the expected rate of return from the current rate of return.<strong>\u03b1= Actual rate of return of portfolio \u2013 Expected rate of&nbsp; return from portfolio<\/strong><\/td><td>Beta is calculated by dividing the covariance of the stock and the market returns by the variance of the market returns.<strong>\u03b2=Covariance (Ri, Rm) \/Variance (Rm)<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span><strong>Conclusion<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>When investing in stocks or any other market-linked securities, it is important to study their beta values, which measure the relative risk of the security in comparison to the whole market. If you have a high tolerance for risk, you should explore high beta stocks. On the other hand, if your risk tolerance is limited, and you want to maintain stability of your portfolio, you should explore for low beta stocks. Use alpha and beta together to estimate the risk-return trade-off of an investment. Then, assess your investment strategy and risk profile to pick stocks and create a diversified portfolio.\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Beta is a measure of the volatility of a stock in relation to the market. Read further to understand types of beta, how to calculate beta, and more.<\/p>\n","protected":false},"author":106,"featured_media":10156,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"spay_email":""},"categories":[1],"tags":[1929],"jetpack_featured_media_url":"https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta.png","uagb_featured_image_src":{"full":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta.png",2086,1086,false],"thumbnail":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-150x150.png",150,150,true],"medium":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-300x156.png",300,156,true],"medium_large":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta.png",768,400,false],"large":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-1024x533.png",770,401,true],"1536x1536":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-1536x800.png",1536,800,true],"2048x2048":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-2048x1066.png",2048,1066,true],"authorship-box-avatar":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-150x150.png",150,150,true],"authorship-box-related":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-70x70.png",70,70,true],"post-thumbnail":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-270x180.png",270,180,true],"contentberg-main":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-770x515.png",770,515,true],"contentberg-main-full":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-1170x508.png",1170,508,true],"contentberg-slider-stylish":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-900x515.png",900,515,true],"contentberg-slider-carousel":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-370x370.png",370,370,true],"contentberg-slider-grid-b":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-554x466.png",554,466,true],"contentberg-slider-grid-b-sm":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-306x466.png",306,466,true],"contentberg-slider-bold-sm":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-150x150.png",150,150,true],"contentberg-grid":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-370x245.png",370,245,true],"contentberg-list":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-260x200.png",260,200,true],"contentberg-list-b":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-370x305.png",370,305,true],"contentberg-thumb":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-87x67.png",87,67,true],"contentberg-thumb-alt":["https:\/\/www.tickertape.in\/glossary\/wp-content\/uploads\/2023\/03\/Beta-150x150.png",150,150,true]},"uagb_author_info":{"display_name":"Harshit Mahey","author_link":"https:\/\/www.tickertape.in\/glossary\/author\/harshit-s-mahey\/"},"uagb_comment_info":14,"uagb_excerpt":"Beta is a measure of the volatility of a stock in relation to the market. Read further to understand types of beta, how to calculate beta, and more.","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/glossary\/wp-json\/wp\/v2\/posts\/10153"}],"collection":[{"href":"https:\/\/www.tickertape.in\/glossary\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/glossary\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/glossary\/wp-json\/wp\/v2\/users\/106"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/glossary\/wp-json\/wp\/v2\/comments?post=10153"}],"version-history":[{"count":7,"href":"https:\/\/www.tickertape.in\/glossary\/wp-json\/wp\/v2\/posts\/10153\/revisions"}],"predecessor-version":[{"id":10723,"href":"https:\/\/www.tickertape.in\/glossary\/wp-json\/wp\/v2\/posts\/10153\/revisions\/10723"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/glossary\/wp-json\/wp\/v2\/media\/10156"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/glossary\/wp-json\/wp\/v2\/media?parent=10153"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/glossary\/wp-json\/wp\/v2\/categories?post=10153"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/glossary\/wp-json\/wp\/v2\/tags?post=10153"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}