Use Beta to Find Rocket Stocks
Beta is a statistical measure of an asset's volatility compared to the general market. Portfolio managers use beta to project expected returns using a pricing model. Investors use beta to find stocks with the potential to become stock rockets, making much larger moves relative to the general market. t is important to understand that beta works both ways, so a market decline will lead to relatively greater losses in a high beta stock.
A beta of 1.0 means the stock will generally move in lockstep with the market. If the market rises +0.50% on a given day, the stock can also be expected to rise about +0.50%. Stocks with a beta below 1.0 will move "less" than the market, and stocks with a beta above 1.0 will move "more" than the market. For instance, if a stock has a beta of 1.5, then it will move 50% more than the market.
The chart above compares E Trade Financial (ETFC) to the SPY (S&P 500 ETF) and Google (GOOG). E Trade Financial (ETFC) has a beta of 2.36. Since July of 2013, EFTC has gained 55%. During the same time period, the SPY gained 13% and GOOG gained 24%. The high beta stock (ETFC) was big winner.
Short-term (swing) traders like high beta stocks because they can get a larger move in a shorter period of time. Investors use beta in a similar way, but they expect to hold a stock for a much longer period of time.To find stocks with the potential for big moves, look for high beta. You can find it at most financial sites, such as Yahoo Finance (see summary). IT is also found on most trading platforms.