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Stock Market Industry Beta
The Stock Market Industry Beta is the measure of the movement of a stock's trading prices as compared to the market as a whole. By knowing this figure, a person will understand just how volatile stock is. A beta of 1 means a stock's price fluctuates exactly as much as the market. A beta less than 1 means a stock is less volatile than the market and a beta greater than 1 means that stock is more volatile than the market.
Beta isn't just for stock; it can also be used for industries. Industry beta compares an industry's volatility to that of the whole market. For instance, technology stocks would be more volatile than the industry, so the beta would be more than 1.
To find the industry beta, you have to have some historical data of the price of the industry stock and the historical price data of the entire market. For example if you were going to calculate beta over the last year for compare technology stocks versus the S&P 500, you would first gather the historical data you need. Next, you have to determine the movements of the two prices after every trading day. This will give a percentage change versus the previous day. Once we have 365 of these we can average the group to determine the average move each made over the last year. Call the average industry movement Ri and the average market movement as Rm. Divide the technology industry's movement by the S&P's average movement, and you'll have an outcome of 1 (equally volatile), less than 1 (less volatile), or more than 1 (more volatile). If you write the function, it would look like:
Ri / Rm = (Ri, Rm) / Rm
Beta can be of great use in stock research when it comes to judging how risky a stock is versus a stable investment with a guaranteed rate of return. Also know that the longer the period of time beta is acquired, the more accurate beta will be. Beta is also valuable when used with stocks that have a long record of high volume trading. Smaller stocks that don't trade a lot can fluctuate wildly on a busy day and throw the beta out of whack for the period being measured.
Beta isn't just for stock; it can also be used for industries. Industry beta compares an industry's volatility to that of the whole market. For instance, technology stocks would be more volatile than the industry, so the beta would be more than 1.
To find the industry beta, you have to have some historical data of the price of the industry stock and the historical price data of the entire market. For example if you were going to calculate beta over the last year for compare technology stocks versus the S&P 500, you would first gather the historical data you need. Next, you have to determine the movements of the two prices after every trading day. This will give a percentage change versus the previous day. Once we have 365 of these we can average the group to determine the average move each made over the last year. Call the average industry movement Ri and the average market movement as Rm. Divide the technology industry's movement by the S&P's average movement, and you'll have an outcome of 1 (equally volatile), less than 1 (less volatile), or more than 1 (more volatile). If you write the function, it would look like:
Ri / Rm = (Ri, Rm) / Rm
Beta can be of great use in stock research when it comes to judging how risky a stock is versus a stable investment with a guaranteed rate of return. Also know that the longer the period of time beta is acquired, the more accurate beta will be. Beta is also valuable when used with stocks that have a long record of high volume trading. Smaller stocks that don't trade a lot can fluctuate wildly on a busy day and throw the beta out of whack for the period being measured.
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