What is ALPHA?
Alpha is like a report card for an investment. It tells you if the investment did better or worse than expected. If an investment has a high Alpha, that means it made more money than you thought it would, even taking into account how the market did.
What is BETA?
Beta is like a measure of how wild an investment is. It tells you how much the investment's price moves compared to the whole stock market. If an investment has a Beta of 1, it moves just like the market. If it has a Beta of 2, it moves twice as much as the market.
Key Differences
- What they measure: Alpha measures how much better an investment performs compared to what you'd expect. Beta measures how risky an investment is by seeing how much it moves up and down with the market.
- What they're used for: Alpha is used to find investments that are really good at making money. Beta is used to understand how risky an investment is and how it might react to big changes in the market.
- How easy they are to understand: Beta is pretty easy to understand. Alpha is a bit more complicated because it involves comparing an investment's performance to what was expected.
- What they tell you: Alpha tells you about performance, Beta tells you about risk.
When to Use Each One
Use Alpha when you're trying to pick the best investments for your money. Let's say you're choosing between two ice cream flavors. Alpha would help you pick the flavor that tastes the best, even if it's a little more expensive.
Use Beta when you're trying to understand how risky an investment is. If you're afraid of heights, you probably don't want to ride the tallest roller coaster. Beta is like a measure of how scary the roller coaster is!
The Bottom Line
Alpha helps you find good investments, and Beta helps you understand risk. Start by understanding Beta so you don't take on too much risk. As you learn more, use Alpha to find investments that are extra special and can make you even more money!