Stock Beta: A Measure of Sensitivity to Market Movements

Stocks have different levels of volatility. Their prices are constantly fluctuating during trading time.

Therefore, an indicator was created to measure the level of sensitivity of stocks to collective market movements (e.g. IDX Composite), namely stock beta.

Source: tickertape.in

Stock Beta Analysis

Stock beta is denoted by the symbol β and is commonly divided into four categories based on its value:

1. Stock beta is greater than 1 (β>1)

Stocks with beta values greater than 1 have price volatility above market movements. For example, when the Composite rises 4% in one day, a stock with a beta of 1.5 will rise about 6%. If the Composite falls by 2%, the stock will fall by 3%. This means that stock beta greater than 1 indicates high sensitivity to market movements.

2. Stock beta is equal to 1 (β=1)

A beta of 1 means that stock price fluctuations follow market movements. For example, when the Composite rises or falls by 3%, stocks with a beta of 1 will also rise or fall by around 3%.

3. Stock beta is less than 1 (0<β<1)

A stock beta of less than 1 indicates lower sensitivity. Its volatility is below the market movement. For example, when the Composite rises 4%, a stock with a beta of 0.5 will only rise 2%. If the Composite falls by 2%, the stock will only fall by 1%.

4. Stock beta is negative or less than 0 (β<0)

Stocks with a negative or minus beta indicates the opposite price movement of the collective market. For example, when the Composite rises 3%, stocks with a beta of -1 will instead fall 3%. Conversely, if the Composite falls 3%, the stock will rise 3%.

Benefits of Stock Beta in Investing

The beta value of a stock is calculated from the risk-free rate, the market or Composite return, and the stock return itself. Stock beta information can be accessed through various investment websites and is useful for investors to manage their risk.

In volatile Composite conditions, stocks with a beta of less than 1 can be an option to minimize risk. If the Composite tends to consistently rise, investors can choose stocks with a beta of 1 or more. Meanwhile, when the Composite is falling, choose stocks with negative beta.

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Disclaimer: The content is made for educational purposes, not a recommendation to buy or sell a particular stock. PT KAF Sekuritas Indonesia is licensed and supervised by the Financial Services Authority (OJK).