How To Make Money - Part III Risk And Expectations
What should you expect from your stock? Well, a good rule of thumb is to look for stock with a better yield than Treasury Bonds, otherwise you should just invest your money in National Debt where it will be safe as houses. But since profit is very closely related to risk, you should be very careful and do your homework thoroughly before investing your hard-earned money in stock with a very high return - odds are it will also have very high risk indexes. This is a principle in finance (and dare we say, in life): the greater the potential return, the greater the amount of risk that an investor must be willing to take. This is so that investors feel compensated for taking on additional risk, and this is why Treasury Bonds have such a low return rate - they are among the safest investments around.
However, if you like risk and are not above a little gamble every now and then, let us tell you about the main risk measures, Alpha and Beta, using Party Poker's stock PRTY as an example.
At the time of writing, these are PRTY's risk measures:
Alpha: 0.0265 Beta: 1.2942
The Alpha measures risk relative to the stock itself: if the analysts say that a stock should earn 10%, but it actually earns 15%, the Alpha would be 5%, or 0.05. In the case of Party Poker, in this particular quarter the stock performed 2.65% lower than was expected buy the market, hence the negative before the index. This on its own doesn't mean it performed badly - you have to know what the expectations and the historical performance of a stock are to make an educated decision.
The Beta coefficient is a little more difficult to explain, but it is roughly a measure of the tendency of a stock to move with the market (for instance if the market as a whole went up or down.) A Beta of 1 means the stock's price will move hand-in-hand with the market, less than 1 means it will move less than the market, and in the case of Party Poker it means that in theory it is 29.42% more volatile than the market, so in case of a market rise it should (again, in theory) go higher and in case of a market low it should drop further than the average. The Beta index is more widely reported, and can be found easily in most stock summaries.
[We'll say it again - we are not trading experts, and this is only an overview of how stock works. Before investing, look for professional advice!]
Our next part will start dealing in some detail with the stock for major gaming concerns, from Harrah's and the World Poker Tour to Cryptologic and Party Gaming.
This article was published courtesy of ThisIsTheNuts.com.
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