Devoted to understanding the basics and fundamentals of investing

The beta is the measure of a stock's volatility in relation to the market as a whole. By definition, the market has a beta of 1.0, and the individual stocks are then  ranked based on how much they deviate from the overall market. The beta value of a stock is a great way to measure the amount of volatility and risk that a stock has. A stock with a high beta value is likely to be volatile and more risky than a stock with a low beta.                

Many market observers believe that stocks with high beta values have far more potential than their low beta peers. In theory, stocks with a high beta should return more since investors should be rewarded for taking on extra risk. A good way to gauge this measure and the expected return is to set a return for the market overall. For example, let's say we expect the market as a whole to gain 9% in the next year. If you invest in a stock with a beta of 2.0 you should expect a return of 18%, and if that stock does not return that amount it is likely not worth the investment risk.

In the current marketplace a stock's beta value is a good tool to use to measure which stocks may be safer from market volatility and downturns. Stocks such as Proctor and Gamble or Johnson and Johnson are generally seen as far more likely to stay afloat in a major market fall than ones such as Apple or Google, and that is reflected in the stock's beta value.

An investor would be wise to have some stocks in their portfolio with low beta values and some with high beta values. You need to diversify your risk inside your portfolio. This diversification allows you to profit in a bull market period, but also have some safety in bear market periods. A stock's beta is a great tool to use in conjunction with other valuation tools when picking your stocks.