One useful concept for investors is "Beta."

Beta is a statistical measurement indicating the volatility of a stock's price relative to the price movement of the overall market.

A stock with a beta of 1 has an expected volatility equal to the overall market. In other words, a stock with a beta of 1 would be expected to move exactly in line with the market.

A stock with a beta less than 1 is less volatile than the market. In other words, during up markets, a stock with a beta less than 1 is expected to increase at a lesser rate than the overall market. Conversely, during down markets, a stock with a beta below 1would be expected to decline by a lesser amount.

It follows then that a stock with a beta greater than 1 will do better than the overall market during up market periods but worse than the overall market during down markets.

To better illustrate beta, let's use the research capabilities of the BUYandHOLD web site.

• On the home page (www.buyandhold.com), look down the left-hand side of the page. You'll see "Research Stocks." Click on these words.
• You're now looking at a page that is asking you the name and/or stock symbol of a company of interest. Enter the company name and hit "Go." For the sake of example, let's use Boeing.
• When you enter Boeing and hit "Go", you're taken to a page listing Boeing. Click on "Boeing."
• You are now on a page showing a variety of information and data on Boeing. Scroll down the page until you come to the heading "Price and Volume" on the left-hand side of the page. At the bottom of that section, you'll see "Beta." In the case of Boeing, the beta is 0.842.

Since Boeing's beta is less than 1, the stock's historical price movements suggest that Boeing will go up slightly less than the market during up periods and decline slightly less than the market during down markets. To be exact, Boeing's beta implies that the stock will increase 8.42% when the overall market increases 10% and decline 8.42% when the overall market declines 10%.

Beta is an extremely useful tool to consider when building a portfolio. For example, if you are concerned about the market and want a more conservative portfolio of stocks to ride out the expected decline, you'll want to focus on stocks with low betas. On the other hand, if you are extremely bullish on the overall market, you'll want to focus on high beta stocks in order to leverage the expected strong market conditions.

One last point about beta is worth mentioning. Beta is just a tool and, as is the case with any tool, is not infallible. Indeed, a stock's beta can change over time. Also, it is not a sure thing, for example, that a stock with a beta less than 1 will do better than the market during down periods. Beta scores merely suggest how a stock, based on its historical price movements, will behave relative to the market. You should never rely exclusively on beta when picking stocks. Rather, beta is best used in conjunction with other stock-picking tools.