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Stock Beta Ratio?
If you primarily trade penny stocks it’s probably safe to say that you might have never come across the term ‘stock beta’ before, and if you have there’s an even greater chance you might be misusing it.
Which is why in this article you will learn a simple way of understanding stock beta & learn how to use it effectively to plan your trades.
What is stock beta?
Stock beta (beta ratio) is the amount of distance between a stock’s price volatility in relation to the rest of the market. Or to state it simply, stock beta tells you how a stock’s price moves in relation to the overall stock market.
How to understand the beta ratio?
The beta ratio is a number given to individual stocks as well as the entire market (which in this case is the entire S&P 500). The S&P 500 is given a beta of 1 & stocks that also have a beta of 1 are considered to fluctuate at the same rate of the market in terms of price.
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Stocks that have a beta greater than 1 are considered to be a riskier investment than the overall stock market, while inversely stocks with a beta less than 1 are considered to be much safer.
Beta as a trading signal?
While not as important as volume, stock beta can be used as a trading signal because high risk or high beta investments also mean higher rewards when trading them successfully. Beta should not be used as the only trading signal in your arsenal, and while it’s a helpful indicator of risk it’s still not an excuse to skip adequate due diligence.
Stock beta is a very important indicator and one of the first you should employ if you want to be a successful stock trader. By knowing the beta ratio of a stock you can quickly see how much implied risk & reward is involved by trading any particular security.
By learning to check for a stock’s beta you can further prepare yourself to make serious money in the overall stock market.
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