The beta is an important metric that investors should consider before putting their money in a stock. Using beta is a great way to understand the overall volatility of an individual security relative to the overall market. Finding low beta stocks can provide you with an alternative investment that is less volatile than the overall market. In this article, we will show you how to find low beta stocks to invest in that can provide you with stable returns.
- Beta is a metric that indicates a stock’s volatility in comparison to the overall stock market
- A beta of 1 indicates that the stock is just as volatile as the regular market
- A stock with a beta of .50 or less is considered a low beta stock
What is Beta?
In investing, the beta is a number that tells investors how volatile a stock is compared to the overall stock market. The market moves up and down every single day and the beta can help investors know the volatility profile of a stock.
Investors use the Greek letter ‘ß’ to represent beta. If you know your risk appetite as an investor you can use beta to avoid certain stocks and invest in others that fit your investment philosophy and criteria.
The beta is calculated using a complicated regression formula. For simplicity, below is an easy way to think about the beta of a stock.
- Beta equal to 1 indicates that the stock’s price moves with the overall market
- Beta greater than 1 indicates that the stock’s price is more volatile than the overall market
- Beta less than 1 indicates that the stock is less volatile than the general market
It’s worth noting that the range of betas’ will vary based on the sector a stock falls under. Before you look at just the beta alone on a stock, check to see the type of sector the stock is in. This can provide you with more insight into the stock itself.
For example, let’s assume has a beta of 2. This implies that the stock is two times as volatile as the general market. If the market were to go up by 5%, we would expect the individual stock to rise by 10%.
Importance of Beta for Investing
The beta of a stock is an important investing metric that provides insight into the volatility of a stock. If you’re generally risk-averse and invest in individual equities, it’s important to take a look at the beta of stock to determine how it compares to the rest of the market.
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If you find a stock that looks very promising but has a very high beta compared to the overall market, it may be better to avoid it. This is because it can pose a risk to your overall investment strategy if the market happens to move sharply in a short period of time.
What is Considered a Low Beta Stock?
A stock with a beta of less than 1 is considered less volatile than the overall market. A beta under .50 is considered half as volatile as the regular market. This means that if the market rallied 10%, the stock would only rally 5%. This would be considered a low beta stock.
So when looking for low beta stocks, at a minimum we want them to be less than 1. Let’s take a look at how to find low beta stocks with our step-by-step procedure below.
How to Find Low Beta Stocks With Finviz
Below is the step-by-step process to use Finviz to find low beta stocks to invest in.
Step 1) In the descriptive tab, configure the tabs as shown below.
Setting up the descriptive tab as shown above, we can filter for large-cap stocks which have good trading volume along with options.
Step 2) Next in the fundamental tab we want to filter for stocks that have minimal debt and a healthy ROE.
We set our filter to find stock with a return on equity of at least 5% and a debt to equity ratio of less than 1. This will help us find stocks that have low amounts of debt and a positive return on equity.
Step 3) In the technical tab we will set our beta parameters as shown below.
We set beta to under 1 to filter for stocks that have a low beta. We also set the performance of the stock to be up for the quarter to find stocks that are performing well which don’t have a ton of volatility compared to the overall market.
Benefits of Investing in Low Beta Stocks
Below are some of the benefits of investing in low beta stocks.
- Lower beta stocks tend to have lower levels of volatility. Lower levels of volatility can smooth out the performance of your portfolio and reduce fluctuations. As you get older, it’s important to adjust your investment portfolio into less risky assets. Investing in lower beta stocks can be a great way to diversify your portfolio away from the performance swings of the regular market.
- Lower beta stocks can perform much better during periods of market pullbacks. Due to lower beta stocks having less volatility than the overall market, they can perform much better when the market pulls back.
- They present great opportunities for low volatility options trading strategies. If you trade options, low beta stocks can present great opportunities to collect premium by selling options contracts.
It’s worth noting that using beta alone to make investment decisions about stocks can have some drawbacks. One of the biggest drawbacks is the fact that beta is a measure of a stock’s historical volatility. It can show you past volatility behavior, but there is nothing stopping a stock from having a higher beta in the future due to changing market conditions.
Overall, finding low beta stocks can be a great way to diversify your investment portfolio into less volatile assets. They are also a great way to reduce risk if you think that the overall market may be in a position to underperform.