Beta is a key term in stock trading that represents the volatility of a particular stock or asset compared to the overall volatility of the financial market or, more specifically, to a benchmark index like the NIFTY. It is a part of the Capital Asset Pricing Model (CAPM), which is used to calculate the rate of return expected from an investment.
Beta is essentially a measure of how a specific stock’s price moves in relation to the broader market movements. For example, a beta of 1 means the stock’s price tends to move with the market. A beta less than 1 signifies that the stock is less volatile than the market. Conversely, a beta greater than 1 suggests the stock price is more volatile than the market.
For example, if a stock has a beta of 1.2, it’s theoretically 20% more volatile than the market, while a stock with a beta of 0.8 would be 20% less volatile. Investors use beta to understand whether a stock moves in the same direction as the rest of the market, and how volatile or risky it is compared to the market.
