Beta is a measure of a company’s stock price risk in comparison to the market.
A company’s stock price faces 2 different kinds of risk. The first one called the “unsystematic risk” is specific to the company and affects only the specific company. For example labor dispute in Maruti Suzuki will affect only shares of the company and not other shares in the market.
However natural calamity, political instability etc. will affect all the participants in the market and hence is called “systematic risk”. Beta is a measure of systematic risk and indicates the extent to which the stock price will move in comparison to the market.
Companies whose beta is greater than 1 are classified as “high beta stocks”. The stocks of such companies are very volatile and move up or down a lot more than index prices. If the investor is foreseeing a bull run in the market, investing in such stocks might increase the possibility of better than market returns. “Low beta stocks” have beta less than 1 and are less volatile. Prices of such stocks are subdued when compared to index prices. These stocks usually act as safeguard against price drop in a bear market.