I was asked if I understood beta when dealing with stocks. My answer was pretty simple.

To begin, I really do not care about the complex calculations in determining the beta value, I’m more interested in what beta means. Understanding beta is easy and important.

What makes beta something worth noting is beta has to do with profits and losses. When looking stocks, beta gives an idea about how the particular equity moves in relation to the overall market.

If beta is greater than 1.0, the stock will move either positive or negative at a larger rate. If beta is 1.0, the stock will move proportionally. And, if beta is less than 1.0, the stock will move at slower rate.

To put beta in perspective, if beta on a stock is 1.16 and the stock market moves 3%, the stock should move 3.48% (3 x 1.16), or 16% more. If beta is 2.0 on a stock is 2.0 and the market moves 3%, the stock should move 6%, and so on.

Beta gives a bit of information about the volatility, or risk, of a stock and can be used with other factors in determining whether or not to purchase the equity.

One last note on beta; the previous examples have to do with stocks. Beta on options is different. (More on that later.)