In the world of finance and industry, beta is a measure of an asset’s risk in relation to a specified stock market index. As small business owner and operator, you’re part of an industry, and it’s useful to know your industry’s beta.
What Low Beta and High Beta Mean
You tend to find more stability and predictability in low beta industries, while industries with higher beta mean more uncertainty. A beta of one means the stock or industry tracks the market’s movement. If beta is less than one, the stock or industry has less volatility than the market. If it’s more than one, it has more volatility than the market.
To evaluate an industry’s beta, you start by choosing a stock market index. For example, say you choose Standard and Poor’s (S&P) 500, one of the world’s most watched stock market indices, to compare your industry’s beta.
- Say your industry has a beta of 1.5 versus the S&P 500, with a beta of 1.0.
- Roughly, that means your industry is 1.5 times more risky than the S&P 500.
- So, if the S&P 500 returns 10% one month, your industry will likely return 15%.
- If your industry has a beta of 0.2, it is only 20% as risky as the index.
- That means if the S&P 500 loses 10%, your industry only loses about 2%.
Whichever index you choose, it serves as the base, at 1.0.
Industry Beta and Small Business
You can’t calculate the beta of a small business directly. Online stock trackers are one way to gauge industry performance. The University of Calgary offers numerous online resources including industry beta data. Also, you might want to review the current Canadian Industry Statistics (CIS) and financial performance data for more than 1,000 industries across the country, such as accommodation and food service, construction, manufacturing, and retail trade, on the federal government website. The data features statistics for profitable and nonprofit small- and medium-size businesses. With more than 30 performance benchmarks, you get a clear picture of how your competitors operate in your industry.
Why It Helps to Know Your Industry’s Beta
Having financial performance data including an industry’s beta can help you develop financial plans, make sales projections and manage risk more effectively. With industry-specific statistics, you get a better understanding of your industry and can keep up with the newest trends that might affect your business. Along with other pieces of information, this data might help you show potential investors or lenders what level of risk exists for your industry as a whole, which might give them more confidence in the success potential of your business venture.
With the right attitude, information, people and tools, your business can succeed no matter what the statistics and industry beta say. More than 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.