One of the primary axioms of investing is the market will fluctuate. That is good news for investors, because if the market did not fluctuate it would be impossible to produce capital gains on a stock trade. The problem is not that the market fluctuates, but that nobody really knows which direction any particular stock will move at any given time. Stock analysts attempt to predict stock movement by assigning certain ratings to individual stocks and industry sectors. Understanding how to read stock market ratings may help you with your personal investing decisions.
1. Determine the type of performance you are looking for in a stock or industry sector. This will help you determine the type of stock market rating you need to explore. There are a multitude of stock market ratings available. Some ratings, such as the Morningstar star rating, the Value Line Ranking System and the Motley Fool CAPS stock rating system are proprietary. To obtain proprietary ratings you may need to subscribe to the investment service that provides them. Other ratings, such as beta ratings, are more ubiquitous, and are typically published along with other public stock trade information such as opening price, closing price, sales volume and price/earnings ration. Beta ratings attempt to predict a stock's price volatility as compared to the market as a whole.
2. Locate the beta rating in the stock report. Different publications may use different methods of listing the beta rating. Some publications may report it a "Beta," while others may use the ancient Greek capital letter for "B" to represent the beta. The beta rating will be a numerical value, which may be any any positive or negative number.
3. Compare the beta rating with the value of 1. A beta rating of 1 indicates the market price of the individual stock is expected to move in tandem with the stock market as a whole. A beta rating of less than 1 indicates the stock price should be less volatile than the market as a whole, while a beta rating of greater than 1 indicates the stock price is expected to be more volatile than the market as a whole. Each .1, plus or minus, represents a corresponding 10 percent increase or decrease in the stock's price volatility. Established, mature utility stocks may have a negative beta rating, meaning there is little expected change in their market price, while a high-tech bio-energy company that just went public may have a beta that is considerably higher than 1, indicating the expectation of greater potential price swings. A stock with a higher beta rating is expected to involve greater risk, but it may also offer greater potential rewards.
- All stock market investments involve risk. Past performance is never a guarantee of future results. You may lose some or all of your investment.
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