What is the beta of a stock?

Beta is one of the measures used to compare the risk-
return profile of different stocks. By definition, the beta of the stock market is
assigned a value of 1.

Now if a stock’s price volatility is
more than that of the market it is assigned a beta greater than 1. The exact value
depends on what the change in the value of the stock is for a unit change in the value
of the market. For example if the value of stock A changes by 20% for every 1% percent
change in the value of the market it is given a higher beta than a stock B which only
changes by 2% for every 1% change in the value of the
market.

Stocks with a higher beta can provide a higher
return than that provided by the market, but at the same time they are also riskier as
the loss incurred when the market falls is much more in the case of these
stocks.

A low beta stock rises and falls at approximately
the same rate as the market. Stocks with a beta less than 0, vary in price opposite to
that of the market, i.e. their value goes up when the market falls and vice
versa.

Investors, use the beta of a stocks, while choosing
between them to find those that match their risk appetite and the returns they expect to
make.