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Finance GlossaryBeta Coefficient
Beta Coefficient
Definition of Beta Coefficient
Beta coefficient is used to measure the volatility of stocks in relation to changes in the market. Basically, Beta helps investors understand the risks associated with a stock compared to the market.
The formula to calculate the Beta coefficient is:
Beta (β) = Covariance (Ri, Rm) / Variance (Rm)
Where:
The formula to calculate the Beta coefficient is:
Beta (β) = Covariance (Ri, Rm) / Variance (Rm)
Where:
- Ri = a stock's return
- Rm = overall market's return
- Covariance = ups & downs of stock returns versus ups & downs of market returns
- Variance = the difference between market returns and its average
Generally, Beta values are of four types:
- Beta < 1.0: stock less volatile than the market
- Beta = 1.0: stock just as volatile as the market
- Beta > 1.0: stock more volatile than the market
- Negative Beta: stock shares inverse relation with the market
Related Terms
Real Estate Investment Trust (REIT)
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate, allowing investors to earn dividends from property portfolios without direct ownership. In India, REITs are listed on stock exchanges and must distribute at least 90% of taxable income as dividends. They provide liquidity, diversification, and exposure to commercial properties like offices and malls.
Bracket Order
A bracket order is used in intraday trading to limit downside and lock upside by placing three types of orders together:
- Buy or sell order at market price
- Target order to square off & book profits
- Stop-loss order to limit loss
Book Running Lead Manager
A book running lead manager is the head or lead of the underwriting process when new shares or securities are issued for their client, most commonly during an IPO.
For context, there was a time when physical ownership certificates were issued. If someone wanted to sell their shares, they’d have to present the ownership certificate and get it transferred to the buyer.
Also known as the book runner, the book running lead manager handles these crucial elements of the underwriting process:
For context, there was a time when physical ownership certificates were issued. If someone wanted to sell their shares, they’d have to present the ownership certificate and get it transferred to the buyer.
Also known as the book runner, the book running lead manager handles these crucial elements of the underwriting process:
- Perform due diligence
- Determine the final offering price
- Record & track interested buyers
- Confirm orders
- Guarantee purchase
Trailing Stop Loss
A trailing stop loss is a risk-management order that adjusts automatically as the market price moves in a favourable direction. It locks in gains while limiting downside risk by setting a stop level at a fixed percentage or price distance below the current price. If the price reverses, the order helps exit the position.
Autoregressive Model
An autoregressive model uses one or more past values to forecast the current value of an asset.
The model assumes that past values can have an impact on the current value but the number of past values it takes into account can vary.
For example, an AR(1) model will use one preceding value, an AR(2) model will use two preceding values, and so on.
The model assumes that past values can have an impact on the current value but the number of past values it takes into account can vary.
For example, an AR(1) model will use one preceding value, an AR(2) model will use two preceding values, and so on.
Over-Allotment Option
An Over-Allotment Option, often referred to as a Greenshoe option in the Indian primary market, gives the underwriters the right to sell more shares (usually 15%) over and above the original IPO size if there is strong demand. If the share price drops below the issue price, the underwriters can use the proceeds from the extra shares to repurchase shares in the open market for support. If the price goes up, they exercise the option and sell the extra shares to the market. This mechanism is regulated by SEBI in India, and the primary purpose is price stabilisation.
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