What is beta
Beta is a number that shows how strongly an asset's price has tended to move when the overall market moved.
The "market" is usually a benchmark stock index (see stock indices). By definition, the benchmark has the reference beta. Every other asset is compared to it:
| Beta compared with the market's | What it suggests |
|---|---|
| Higher | The asset has tended to move more than the index, in the same direction |
| Equal | The asset has tended to move in line with the index |
| Lower but positive | The asset has tended to move less than the index, in the same direction |
| Near zero | Little link to the index's moves |
| Negative | The asset has tended to move opposite to the index |
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A worked example (hypothetical)
Take two invented companies listed on the same exchange:
- Company A, a technology firm with a beta above the market's.
- Company B, a utility with a beta below the market's.
On a day when the index rises, history suggests A tends to rise more than the index and B tends to rise less. On a day when the index falls, A tends to fall more and B tends to fall less. A holder of A takes a larger swing with the market in both directions. This is a tendency from past data, not a rule for any single day.
Formal definition
Beta comes from regressing the asset's returns on the market's returns over a chosen period:
β = Cov(Rᵢ, Rₘ) / Var(Rₘ)
- Rᵢ is the asset's return and Rₘ is the market's return.
- Cov is covariance and Var is variance.
The formula can also be written as the correlation coefficient multiplied by the ratio of the asset's volatility to the market's volatility. In the capital asset pricing model (CAPM), beta measures systematic risk, which is the part of risk that diversification cannot remove. The return left over after accounting for beta is called alpha.
Where you see beta
- Stock quote pages and screeners: a beta field, usually with the period and data frequency noted next to it.
- Fund factsheets: the fund's beta against its stated benchmark.
- Analyst reports: inputs for cost of equity and portfolio exposure.
- News: phrases such as "high-beta tech stocks sold off". This means stocks that tend to swing more than the index.
Edge cases and limits
- Inputs change the result. A different benchmark, time window or data frequency (daily, weekly or monthly) gives a different beta for the same stock.
- Beta is backward-looking. A merger, new debt or a change in business can shift it.
- Low correlation weakens it. If the asset barely tracks the index, beta says little, even when the volatility of the asset is high.
- It is not total risk. Company-specific shocks, gaps and fat tails are not captured.
- It is different from delta. Delta measures an option's sensitivity to its underlying asset, not to the market.
When a CFD on a stock or index is traded with leverage, a high-beta asset adds larger swings on top of the leverage. Losses can build fast and can exceed what you expected. See risk management.
Related terms
Annualized volatility · Blue chip · Emerging markets · Bear market · Bull market · Trading glossary
Frequent questions
What does beta mean in simple words?
Beta shows how much a stock has tended to move when the market moves.
Is a high beta good or bad?
Neither. A high beta means larger swings in both directions. Whether that suits someone depends on their risk tolerance.
Can beta be negative?
Yes. A negative beta means the asset has tended to move opposite to the benchmark, although usually only weakly.
Why do websites show different betas for the same stock?
Each site may use a different index, period or data frequency in its calculation.
Does beta predict future prices?
No. Beta describes past co-movement with the market and can change over time.
