Beta

Beta measures how much a stock tends to move relative to the overall market. A beta of 1.0 means the stock historically moves in line with the market. Above 1.0 means it moves more; below 1.0 means it moves less. It is calculated using a regression of the stock’s returns against a market index (usually the S&P 500) over a trailing period, commonly 5 years of monthly returns.

A stock with a beta of 1.5 has historically moved about 50% more than the market in either direction. If the market goes up 2%, this stock has tended to go up about 3%. If the market drops 2%, expect roughly a 3% drop.

A beta below 1.0, say 0.6, means the stock has been more stable than the market. Utilities and consumer staples companies often have low betas. High-growth tech stocks and small caps tend to have higher betas.

Beta is backward-looking. It tells you what the stock has done, not what it will do. A company can have a low beta for years and then suddenly become volatile after a management change or industry disruption.

Beta is most commonly used for portfolio construction rather than individual stock picks. If you want your portfolio to be less volatile than the market, you tilt toward low-beta stocks. If you want more exposure to market moves (and are comfortable with the risk), you tilt toward high-beta stocks.

Some traders check beta before earnings season. A high-beta stock is already volatile on normal days, so it can produce larger-than-expected moves around earnings surprises.