Reading Recent Picks Contacts Home Glossary . We define only those terms where our definition is critical to properly understanding the term in context of The Market Report. The market beta is always 1.0, so a stock with a beta of 1.0 means that the stock moves precisely with the market. When the market rises, the stock will rise on average to the same degree, and when the market drops, the stock will drop to the same extent. A beta of more than one indicates higher risk than the market, while a beta of less than one indicates lower risk than the market.
Some stocks have a negative beta and are inversely correlated with the market.
When the market goes up, they go down, and vice versa. Many investors like to have high beta stocks in their portfolios when they are bullish on the market, because if the market does go up, then their stocks will go up even faster than the market. If they become bearish on the market, they then switch to low beta or negative beta stocks because their portfolios will probably go down less than the market, and therefore outperform the market. Short-term traders who use the dual tactics of buying long and selling short tend to prefer high beta stocks regardless of whether the market is rising or falling. The higher beta stocks produce maximum price movement as quickly as possible, and though this method does allow for faster and larger gains, due to the increased risk, a Risk Control System is strongly recommended.