What Is Beta? How Much a Stock Moves When the Market Moves
How much the stock tends to move for each one percent move in its market index. Above 1 is more volatile than the market, below 1 less; a 20-day figure changes quickly.
Contents (5 sections)
Beta measures how strongly a stock moves with the market. A beta of 1 means the stock has tended to move one percent for each one percent move in the index; 1.5 means it has moved one and a half; 0.5 means half.
How it is calculated
Take the daily percentage changes of the stock and of a market index over the same days. Beta is how much the two move together (their covariance) divided by how much the index moves on its own (its variance). In plain terms, it is the slope of the line you would draw through a plot of the stock's daily returns against the index's.
Two things follow from the formula:
- Beta depends on which index it is measured against. A Hong Kong stock measured against the Hang Seng and against the S&P 500 has two different betas.
- Beta depends on the period. Over a few weeks it reflects what has just been happening to the stock; over years it reflects the kind of business it is.
Reading it
| Beta | What it usually means |
|---|---|
| Above 1.5 | Moves much more than the market, both ways |
| 1 to 1.5 | Somewhat more volatile than the market |
| Around 1 | Moves with the market |
| 0 to 1 | Moves less than the market: utilities, staples |
| Below 0 | Has been moving against the market over the period |
What it does not tell you
- How volatile the stock is on its own. Beta captures only the part of the movement that comes with the market. A stock can have a beta of 0.3 and still swing wildly on its own news. ATR measures total movement.
- Whether it beats the market. A high beta in a rising market looks like outperformance and is only leverage on the index. Relative strength is the measure of doing better than the market.
- The future. A short-period beta is a description of recent weeks.
In Stock Compass
The rule indicator is beta_index_20d, under Market & Sector: beta over the last 20 daily returns, measured against the market's own index. The benchmark is chosen automatically: the Hang Seng Index for Hong Kong stocks, the CSI 300 for China A-shares, and the S&P 500 for US stocks.
Twenty days is short. The value moves a good deal from week to week and is best used as a rough filter, for example beta below 1.5 to keep the most market-sensitive stocks out of a rule, or above 1 to prefer them when the index is above its own average. It needs 21 days of prices for both the stock and the index. Sector rotation and relative strength covers measuring a stock against the market.
FAQ
Is a high beta good or bad?
Neither. It means the stock amplifies the market: it tends to rise more when the index rises and fall more when it falls. It suits a rule that only buys when the market trend is up, and it increases the risk of any position held through a market decline.
Why does the beta here differ from the one on a finance website?
Two reasons, usually: the period and the index. Finance sites mostly publish beta over three to five years of monthly returns. Stock Compass measures 20 daily returns against the stock's home-market index, which is a much shorter and more changeable figure.
Can beta be negative?
Yes. A negative value means the stock has tended to move opposite to the index over the period. Over 20 days this happens fairly often by chance; over years it is rare.
Definition only — not investment advice.