Investment whether short term or long term will come with two important aspects inherent in it. They are the returns and the risk. When you invest in any kind of investment there is always the risk element that is not avoidable. The same is applicable to stock investment as well. However the level of risk is something that you could to some extent make a choice. If you are ready to take up higher risk then you may invest in such shares that are highly volatile. It’s not necessary that if you take up higher risk that will guarantee higher returns. So the next factor that anybody consider while investing in any kind of shares are the returns. Returns in the form of dividend or price increase to fetch higher profits are something any investor will look for.
Alpha and Beta are two different concepts that will describe the various criteria of risks involved in any portfolio.
Alpha:
The Alpha is nothing but refers to all those parameters that in a way affect the stock and its performance. Based on this the investor will decide about his investment patterns. In simple terms Alpha is defined as the return on an investment after the adjustment of the risk associated with it. Every stock will have a benchmark and if you get anything in return which exceed this mark then that is termed as the Alpha. So this is mainly used by the investors in order to track the performance of their portfolio. If a security has a good alpha then the investor will preferably invest in them.
The simple principle here is that if the performance of the portfolio is much better than the set standards then the equation stands as alpha greater than 0 and so a great investment option. On the other hand if the performance is much below the standard then the equation stands as Alpha is less than 0. This means that depending on the risk taken the portfolio has failed to even earn the minimum return and shows a negative trend in investment. Another state is when the return is almost equal to the set standards then the equation will be alpha equal to 0. This means that the investment is doing well at the current levels and whatever returns was expected from it has been reaped by the investors.
Beta:
The beta of stocks is nothing but the market risks that will affect the stock in several ways. This will measure the stock volatility. Every stock and its price movement are studied in relation to the total price fluctuation of the market under the Beta. The beta will have either positive or negative values.
In case the Beta is equal to 1 then it depicts that the price of the stock will move in correlation with the market. In a volatile market the price of the stock may move much more than the price of the entire market and in such cases the Beta will be positive. Beta will remain negative only if the price of the stock decreases below the market price and this will happen only when the market is not very volatile.
When considering the high beta though the chances of getting better returns are more but at the same time their risk levels are extremely high. Such companies are in their initial years of growth and so the investors will benefit from better returns. Beta stocks that are negative will have lesser risks as well as the returns also will be too low. Commonly seen aspect is that most of the utility stocks will be negative Beta and the IT or other high profile stocks will be in positive beta.
When we understand the concepts of Alpha and Beta stocks both the parameters have to be considered simultaneously. They explain all the elements of risk in a market and so cannot be seen as one individual aspect. So the best investment could be the one that has beta of low or negative while the Alpha is very good. Another point is that any investment decision cannot be taken just based on alpha and beta values. These values are determined based on the historical performance of a company. So they will not be able to reveal the perfect future performance of your stock. So consider other market indicators as well while taking your investment decision.