When trying to find the right company to invest in it’s important to know how risky that company is. Some investors might be looking to take on more risk in attempts to achieve a higher return on their investment, while other investors might just be looking for a safe place to hold their money with little risk of losing it. Here are some simple tips to help determine the risk/volatility of a stock:
The Stocks Beta – This is a very simple way to tell how risky a stock is relative to the overall stock market. Simply go to a financial website, like Yahoo Finance, and type in the stocks symbol or name. That’s it! The Beta will be listed under the stock price along with other stock info.
So what does Beta tell you?
A Beta equal to 1 means the stock is correlated to the whole market (or just as volatile as the market). A stock with a Beta larger than 1 is considered more risky (more volatile) than the market. A Beta less than 1 is less volatile when compared to the overall market.
Size of the Company – A company’s size can be measured by its market capitalization or Market Cap. Market Cap is calculated by taking (# of shares outstanding) x (the price of the stock). Large cap or small cap companies are just as they sound – large or small companies.
Larger companies tend to have larger cash reserves and have built stronger business relationships over the years. This usually means they are a safer investment with less volatility.
Smaller companies, on the other hand, might be on the start up and don’t have as much when it comes to cash flow and business relationships. This is why small cap stocks are normally riskier than large cap stocks.
Research Stock Charts – Simply looking at a stock’s chart can give you some helpful price history. Is the stock currently at a market high? or low? Some stocks may present a buying opportunity if they are trading at a lower price while others may be over priced and more dangerous to invest in. Now, stocks history has no indication on what the future may hold for a particular stock, but it’s still something to keep in mind while investing.
Be Aware of Market Risk! – Everyone investing in the stock market is exposed to market risk, also known as systematic risk. This is the risk of bad news affecting the overall market. Even a great stock can lose value if the market as a whole is in a decline.