Beta, a key component of the Capital Asset Pricing Model, measures a stock's volatility relative to a benchmark, typically the S&P 500. This metric helps assess a stock’s impact on portfolio risk and assists in building low-risk, balanced portfolios. Beta is represented by a number: a beta of one indicates a stock moves in line with the market, while a beta higher than one suggests greater volatility and higher risk compared to the market.

Understanding beta involves distinguishing between systemic and non-systemic risks. Systemic risks are inherent to the entire financial system and cannot be avoided, affecting the market as a whole. An example is the COVID-19 pandemic, which caused a significant market downturn that impacted all stocks. Non-systemic risks, on the other hand, are specific to individual companies or sectors and can be mitigated through diversification or sector avoidance, such as the risks associated with the Electric Vehicle (EV) industry bubble.

Investors use beta to gauge a stock’s susceptibility to market movements. A stock with a beta of one has systemic risk, meaning its performance will likely mirror market fluctuations. Conversely, a stock with a beta lower than one is less influenced by market movements and is therefore less exposed to systemic risks. This understanding allows investors to make informed decisions about portfolio composition and risk management.

MarketBeat's team of analysts have put together a special report that explores beta's impact and usage, as well as what little-known opportunities there are to invest in related companies.