Every one of us would love to make money in the stock market as long as we don’t have to take major risks. However, the irony is that stock market trading involves risks and you cannot think of investing without taking some amount of risk. Risk and returns are the two most significant aspects of investments made by the investors. In fact, each investor investing money in stock trading would love to gain money with minimum risks. In this article, we will discuss about the Alpha and Beta factors in stock market investment that are used to measure the risks inherent in trading in stocks.Learn trading and know about the Alpha and beta factors to emerge as a winner.
Alpha basically defines the factors that affect the performance of a single stock. It is also related to the skill of the fund manager while selecting stocks. On the other hand beta refers to stock market risks. Alpha acts as an extremely good parameter to evaluate the performance of the fund manager regarding management of the stock. This is because Alpha basically refers to the risk-adjusted return on a particular investment. It describes the surplus return on a stock investment over a given standard. Therefore, an investor should look into buying securities with positive alpha since these are expected to get higher returns.
For instance, an investment outperforming the yardstick will translate into more return for a given amount of risk and vice versa. If the alpha is zero, which is usually the expected value of it in an efficient market, it means the investor has gained whatever he had spent. The amount of alpha generated by a fund determines the performance of the fund managers. Therefore, it is considered to be a measure of the capabilities of a fund manager to produce profits over market returns. The fees of the fund managers also depend on the generation of alpha.
Beta is basically used to measure the volatility of stock in the market. It shows the dynamic relation between movement of market and movement of stock along with it. A stock can have either a positive or a negative value of beta. The beta value of S&P 500 Index is 1. When the value of beta is 1, the price of securities will move along with the market. When beta is negative it displays that the stock is less volatile and moves behind the market. When beta is positive it indicates more volatility of the stock with the market. Stocks with high beta value normally generate high returns, but also have high risk. High tech stocks have high beta and hence are able to produce more returns.