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There are numerous financial figures to analyze when determining which stocks to buy, and the beta of a stock is one of the most important.
That's because the beta of a stock indicates its volatility.
A beta of one (1) indicates the stock has the same volatility as the broader market and will therefore move with the market.
Anything higher than one means the stock is more volatile than the market. A stock with a beta of two or higher is considered a "high beta stock." A beta of less than one means the stock will experience less volatility than the market.
Most stock screeners provide the stock's beta for investors. Websites like Google Finance and Yahoo! Finance also provide this information.
But determining a stock's beta isn't the only thing you need to know. Investors also need to know how to apply this figure…
How to Analyze the Beta of a Stock
When analyzing the beta of a stock, you need to take into account the company's industry.
For instance, utility stocks tend to have low beta figures since that industry tends to have low volatility. Conversely, tech stocks typically have much higher beta figures.
Take the utility stock Public Service Enterprise Group Inc. (NYSE: PEG), for example. It's a $20 billion electric and natural gas holding company with a beta of 0.57 according to Yahoo! Finance. To find out how that beta rates, you'd have to compare it to similar utility companies like Pepco Holdings Inc. (NYSE: POM) and its 0.27 beta. Both of these utility stocks have low betas compared to the market, but PEG is more than twice as volatile as POM.
The same thing applies when looking at a different industry, like tech. Ambarella Inc. (Nasdaq: AMBA) and Tesla Motors Inc. (Nasdaq: TSLA) have betas of 1.21 and 1.16, respectively, according to Yahoo! Finance. While those betas are above one, they are still low compared to small tech companies, which tend to have much higher betas. SanDisk Corp. (Nasdaq: SNDK), for example, has a beta of 2.09.
While the beta of a stock is great for determining volatility, it should not be the only figure you research when investing…