Beta

The Beta coefficient, in terms of finance and investing, is a measure of a stock's volatility in relation to the rest of the market. Beta is calculated for individual companies using regression analysis.

That's worth knowing if you want to avoid being shocked into panic selling after buying it. Some stocks trend upward with all the consistency of a firefly. Others are much more steady. Beta is what academics call the calculation used to quantify that volatility.

The beta figure compares the stock's volatility to that of the S&P 500 index using the returns over the past five years. If a stock has a beta of 1, it means that over the past 5 years its price has gained 10% every time the S&P 500 has moved up 10%. It has also declined 10% on average when the S&P declines the same amount. In other words, the price tends to move in synch with the S&P, and it is considered a relatively steady stock.

The more risky a stock is, the more its beta moves upward. A figure of 2.0 means a gain or loss of 20% every time the S&P gains or loses just 10%. Likewise, a beta of 0.5 means the stock moves just 5% when the index moves in either direction. A low-beta stock will protect you in a general downturn, a high Beta means the potential for big rewards in an upturn.

That's how it is supposed to work. But it is not guarantees about the future. If a company's prospects change for better or worse, then its beta is likely change, too. So use the figure as a guide to a stock's tendencies only.