Using Beta to Understand a Stock’s Risk

A stock’s beta indicates how volatile its price is compared to other stocks. And that is a clue to the degree of risk you’re taking in buying that stock.

In short, a beta number above 1 indicates a stock whose price has greater ups and downs than the market as a whole. A number below 1 stays steady. A zero means the stock is precisely as volatile as the market at large.

The current beta for a stock is listed on its quote summary page on most financial websites and trading platforms.

Key Takeaways

• Beta indicates how volatile a stock’s price is in comparison to the overall stock market.
• A beta greater than 1 indicates a stock’s price swings more wildly than the overall market.
• A beta of less than 1 indicates that a stock’s price is less volatile than the overall market.
• A beta of 1 indicates the stock is no more or less volatile than the overall market.

What Is the Beta?

Any stock index, such as the Standard & Poor’s 500 Index, moves up and down constantly. At the end of the trading day, we conclude that “the markets” were up or down based on the indexes.

An investor considering buying a stock should know whether that stock is more volatile or steadier than the markets in general. It indicates whether that stock is likely to get stuck in a rut when most stocks are rising or react drastically when the market struggles.

The beta is the number that tells the investor how that stock acts compared to all other stocks, or in comparison to the stocks that comprise a relevant index of its peers.

Beta measures a stock’s volatility, the degree to which its price fluctuates in comparison to the overall stock market. That is a measurement of the stock’s risk compared to that of the greater market.

Beta is also useful when comparing stocks in a sector or industry. It indicates the stock’s volatility compared to that of its peers.

Analysts use the Greek letter ‘ß’ to represent beta.

What Is Tesla’s Beta?

Tesla Inc. (TSLA) has a beta of 2.30 as of Jan. 17, 2025. It had a 52-week high of $488.54 and a 52-week low of $138.80.

Analyzing Beta

Beta is calculated using regression analysis. A beta of 1 indicates that the security’s price tends to move with the market. A beta greater than 1 indicates that the security’s price tends to be more volatile than the market. A beta of less than 1 means it tends to be less volatile than the market.

Many young technology companies that trade on the Nasdaq stocks have a beta greater than 1. Many utility sector stocks have a beta of less than 1.

Essentially, beta expresses the trade-off between minimizing risk and maximizing return. Say a company has a beta of 2. This means it is twice as volatile as the overall market. We expect the market overall to go up by 10%. That means this stock could rise by 20%. On the other hand, if the market declines by 6%, investors can expect a loss of 12%.

If a stock had a beta of 0.5, we would expect it to be half as volatile as the market: A market return of 10% would mean a 5% gain for the company.

Here are the beta levels, and what they signify:

• Negative beta: A beta less than 0, which would indicate an inverse relation to the market, is possible but highly unlikely. Some investors argue that gold and gold stocks should have negative betas because they tend to do better when the stock market declines.
• Beta of 0: Basically, cash has a beta of 0. In other words, regardless of which way the market moves, the value of cash remains unchanged (given no inflation).
• Beta between 0 and 1: Companies that are less volatile than the market have a beta of less than 1 but more than 0. Many utility companies fall in this range.
• Beta of 1: A beta of 1 means a stock mirrors the volatility of whatever index is used to represent the overall market. If a stock has a beta of 1, it will move in the same direction as the index, by about the same amount. An index fund that mirrors the S&P 500 will have a beta close to 1.

The stocks of established companies rarely have a beta higher than 4.

Why Beta Is Important

Are you prepared to take a loss on your investments? Many people are not and they opt for investments with low volatility.

Others are willing to take on additional risk for the chance of increased rewards. Every investor needs to have a good understanding of their own risk tolerance and a knowledge of which investments match their risk preferences.

Important

Using beta to understand a security’s volatility can help you choose the securities that meet your criteria for risk.

Investors who are very risk-averse should put their money into assets with low betas, such as utility stocks and bonds or Treasury bills.

Investors who are willing to take on more risk may prefer to invest in stocks with higher betas, promising outsized returns at the risk of outsized losses.

Where to Find the Beta Number

Many brokerage firms calculate the betas of securities they trade and publish their calculations in a beta book. These books offer estimates of the beta for almost any publicly-traded company.

Yahoo! Finance is among the websites that publish beta numbers. Enter the company name or symbol in the search field, then click on “Statistics.” You’ll find the beta under the heading “Stock Price History.”

The beta on Yahoo! compares the activity of the stock over the last five years to that of the S&P 500 Index. For example, as of Jan. 17, 2025, the beta for Microsoft (MSFT), as listed on Yahoo! Finance, is 0.90.

Important

A beta of “0.00” on Yahoo! Finance means that the stock is either a new issue or doesn’t yet have a beta calculated for it.

What Is the Drawback of Relying on Beta?

The biggest drawback to beta is that it’s a backward-looking number. Like any historical measure, it can show you the pattern so far but it can’t tell you what’s going to happen in the future.

The second caveat is that beta is a measure of systematic risk, which is the risk that the market faces as a whole. The market index to which a stock is being compared is affected by market-wide risks.

The fix for that problem is to compare a stock’s beta to that of its peers to see how volatile it is within its industry or sector.

What Is a ‘Bad’ Beta?

A bad beta is determined by the investor who’s looking at the number.

A very conservative investor might avoid any stock with a beta of more than 1, as it could indicate an unacceptable degree of risk. A very aggressive investor might look at only those stocks with a beta above 1, while doing some additional research to determine whether there’s more upside than downside in its past and its potential future performance.

What Else Does ‘Beta’ Mean?

The word beta has long been used by technology companies to describe the first wide release of software products for testing.

Beta also is slang for a weak person, according to Dictionary.com.

Beta is the second letter in the Greek alphabet.

The Bottom Line

Beta is just one of many numbers that stock analysts and investors look at when evaluating a potential buy. However, it’s an important number. It can be read as a straightforward indicator of its price volatility in comparison with the stock market at large and in comparison with its peers.