Stock Investment

Beta investments are stocks that are generally perceived to offer the potential to outperform the market. A stocks beta is a standard measure of performance used by the financial industry. The calculation uses regression analysis on past data to determine a stocks volatility relative to the market. Stocks that have a beta greater than 1 are deemed to have greater volatility than the overall market whilst stocks that are less than 1 are considered to be less volatile than the market. Safe have stocks such as utilities usually have a beta of less than 1 and some technology stocks have a beta of greater than 1.

High beta stocks can be selected on the basis that they offer potentially superior returns. Generally, the main market index is used for beta calculations but a stocks beta can also be calculated relative to its sector index. Whilst beta is considered a good standardized measure of performance, it does however, have some weaknesses. The stocks beta is calculated on past data which is not necessarily a good indication of future performance. The beta of a stock is an averaging approach. In reality, a stock may actually have a beta of 3 during certain time periods and be less than 1 when the stock is not active. A stocks beta is therefore subject to different degrees of market gyration which can also be related to how hot the sector is.

Beta investing is a consideration for risk. Generally, if you are risk adverse and do not like to 'stomach' market gyrations, you would select low beta stocks for investment purposes. Investors chasing higher returns look for exposure to higher beta stocks. In terms of portfolio management, an investor can use beta investment calculations to weight a portfolio. A high percentage of the portfolio is allocated to less risk adverse securities and a small percentage chases superior returns by selecting stocks that are more prone to volatile market movements.

Institutions and professional investors use beta stock models for the purposes of making investment decisions. Many of these models are considered highly confidential and not readily available to the investment public. In general, selecting high growth stocks offers high beta potential and providing an investor uses stops as protection, superior returns can be accomplished. You can learn more about this approach by reading up on material provided by William O'Neil on the investors.com website or purchasing one of his books. You will also generate many good ideas of your own after reading the material.

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