What Is Beta? | How Do Stocks Work?

Beta is a measure of how much a stock’s returns have tended to move with the overall market. A beta of 1 means the stock has historically moved roughly in step with its benchmark index, above 1 means it has moved more, and below 1 means less.

How to read it

Beta	What it suggests
1.0	Has tended to move about as much as the market
1.5	Has tended to move about 50% more than the market, both up and down
0.5	Has tended to move about half as much as the market
Near 0	Little relationship with the market’s moves
Negative	Has tended to move against the market (rare for stocks)

The benchmark is usually a broad index such as the S&P 500 for US stocks or the S&P/TSX Composite for Canadian ones. See what is a stock index.

A tiny example

Maple Widgets Inc. (a hypothetical company) has a beta of 1.3 against the S&P 500. If the index falls 10% in a month, a beta of 1.3 suggests Maple Widgets would fall about 13% on average, though in any given month it could fall more, less, or even rise. Beta describes a tendency, not a forecast.

How it’s calculated

Beta comes from a regression of the stock’s past returns against the index’s past returns. Formally:

Beta = covariance(stock, market) / variance(market)

Data providers make different choices: five years of monthly returns, two years of weekly returns, a different benchmark. The same stock can show a beta of 0.9 on one site and 1.2 on another. Check the method before comparing.

In finance theory, beta is the risk input to the capital asset pricing model (CAPM), which is often used to set the discount rate in a valuation. See how to value a stock.

What beta leaves out

Company-specific risk. Beta only captures market-related moves. A low-beta stock can still collapse on a lawsuit, fraud, or a failed product. That risk is reduced through diversification, not by picking low betas.
It changes. A company’s beta drifts as its business, debt, and the market change.
It is backward-looking. It describes the past relationship, which may not hold in the next crisis.
Low beta is not low volatility. A stock can swing wildly for its own reasons and still have a low beta. See volatility.