If you are going to invest in the stock market looking for big bucks in as little time as possible, you must face some risk. The stock market is not a get rich quick scheme in general. If you want to earn a lot of money, you have to invest on stocks which have the potential to increase in value in relatively short time but also have the tendency to slide in a shorter time.

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Each of us has his or her preference when it comes to trading stocks like we all do when it’s time to identify long term trend trading. There would be individuals who would like to earn a lot of money on investing in a short time. Risky investments are suited for them. But how will one know if a certain stock is risky or not? We can see how volatile a stock is depending on its alpha and beta.

The alpha of a security or fund portfolio is computed by measuring the folio’s volatility with that of a benchmark index. A positive alpha means that the security or fund portfolio is less volatile than the benchmark index. For all investors, it is a good choice to choose a folio with a positive alpha. Although some may want a risky investment for short-term high earnings, it is still possible to acquire stocks with positive alpha but has the potential to be a high-income investment.

Beta on the other hand is the measure of the volatility or systematic risk of a portfolio in comparison to the market as a whole. This can be considered as the tendency of a certain portfolio to react to trend swing sin the market. The market is given a beta of 1.0. Portfolios with a beta coefficient of 1.0 will have the same movement as the market making it a good bet for those who want to stick to stock trading for a long time. Those with beta of less than 1.0 will be less volatile than the market and those with higher betas are more volatile than the market theoretically.

For risk takers who want higher returns, investing on stocks with betas of more than 1.0 is recommended. But since these investments are volatile, investors should be on top of it all the time, making sure that they would sell before the stock plunges.

This entry was posted on Thursday, October 25th, 2007 at 3:20 am and is filed under Stock Investing Basics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.