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A financial instrument’s beta is a measure of its risk or volatility when compared to the wider market.
Beta definition
A financial instrument’s beta is a measure of its risk or volatility when compared to the wider market.
It is mainly used in the capital asset pricing model (CAPM), a popular financial model used to balance the inherent risk of an instrument with its expected return. More volatile markets are capable of providing higher returns, but are also riskier to invest in.
Beta is listed as a scale. If an instrument has a beta of one, its volatility matches that of its wider market. If its beta is less than one, it will be less volatile than the wider market; if it is greater than one then it will be more volatile.
Beta is calculated based on past form only, taking into account the historical volatility of the instrument and comparing it to the wider market.
Beta example
In shares dealing, shares will often have beta below one. Utility stocks, for instance, tend to be more resistant to market moves and will as such tend to have low beta. On the other hand, highly volatile start-ups or technology companies will often have a beta well in excess of one.
The value of shares, ETFs and ETCs bought through a share dealing account, a stocks and shares ISA, a SIPP or an IG Smart Portfolio can fall as well as rise, which could mean getting back less than you originally put in. Spread bets and CFDs are leveraged products and can result in losses that exceed deposits. Spread betting and CFD trading are not permitted within the IG SIPP. Please ensure you fully understand the risks and take care to manage your exposure.
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