Stock Market Industry Beta is a way to compare how a stock's price moves to how the market as a whole moves. If you know this number, you can tell how volatile a stock is. A beta of 1 means that the price of a stock moves up and down the same amount as the market. If a stock's beta is less than 1, it moves less than the market, and if it's more than 1, it moves more than the market.
Betas can also be found for whole industries. The "industry beta" would compare how volatile an industry is to how volatile the market as a whole is. For example, technology stocks are usually more volatile than the industry as a whole, so the beta is usually higher than 1.
To figure out an industry's beta, you need to look at the past prices of both the industry stock and the market as a whole. For example, if you wanted to figure out how beta has changed over the past year so you could compare technology stocks to the S&P 500, you would first need to get the historical data you need. Next, find out how the two prices changed at the end of each trading day. This will show the percentage change from the day before. Once we have 365 of these, we can find the average number of steps each person took in the last year by taking the average of the whole group. The average change in an industry can be called Ri, and the average change in the market can be called Rm. When we divide the average movement of the technology industry by the average movement of the S&P, we get a number that is less than 1, the same as 1, or more than 1. (more volatile). This function looks like this when it's written down:
Β = Ri / Rm or B = Covariance(Ri , Rm)/ Variance (Rm)
Beta can help you decide how risky a stock is compared to a stable investment with a guaranteed rate of return when researching stocks. It's important to remember that the beta will be more accurate the longer it's been around. Also, betas are more useful for stocks that have been trading a lot for a long time. Small stocks that don't trade much can have wild swings on a busy day, which can throw off the beta for the time period being looked at.
