What does a company's beta measure?

A company's beta specifically measures a stock's volatility in relation to the overall market. It indicates how sensitive the stock's price is to market movements. For instance, a beta of greater than one suggests that the stock is more volatile than the market, meaning if the market goes up or down, the stock is likely to experience a larger price change in the same direction. Conversely, a beta of less than one indicates that the stock is less volatile than the market.

Understanding beta is important for investors as it helps gauge the risk associated with holding a particular stock in a given market environment. A higher beta implies greater risk, but potentially greater returns, while a lower beta may indicate a more stable investment, typically associated with less risk and potentially lower returns. This comparison to the overall market provides investors with insights into potential patterns of behavior concerning investment decisions under varying market conditions.