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If you're interested in Banco Latinoamericano de Comercio Exterior, S.A (NYSE:BLX), then you might want to consider its beta (a measure of share price volatility) in order to understand how the stock could impact your portfolio. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. First, we have company specific volatility, which is the price gyrations of an individual stock. Holding at least 8 stocks can reduce this kind of risk across a portfolio. The second sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the market.
Some stocks mimic the volatility of the market quite closely, while others demonstrate muted, exagerrated or uncorrelated price movements. Beta can be a useful tool to understand how much a stock is influenced by market risk (volatility). However, Warren Buffett said 'volatility is far from synonymous with risk' in his 2014 letter to investors. So, while useful, beta is not the only metric to consider. To use beta as an investor, you must first understand that the overall market has a beta of one. A stock with a beta greater than one is more sensitive to broader market movements than a stock with a beta of less than one.
See our latest analysis for Banco Latinoamericano de Comercio Exterior
What does BLX's beta value mean to investors?
Given that it has a beta of 1.28, we can surmise that the Banco Latinoamericano de Comercio Exterior share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, Banco Latinoamericano de Comercio Exterior shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. Beta is worth considering, but it's also important to consider whether Banco Latinoamericano de Comercio Exterior is growing earnings and revenue. You can take a look for yourself, below.
How does BLX's size impact its beta?
Banco Latinoamericano de Comercio Exterior is a small cap stock with a market capitalisation of US$780m. Most companies this size are actively traded. It is quite common to see a small-cap stock with a beta greater than one. In part, that's because relatively few investors can influence the price of a smaller company, compared to a large company.
What this means for you:
Since Banco Latinoamericano de Comercio Exterior has a reasonably high beta, it's worth considering why it is so heavily influenced by broader market sentiment. For example, it might be a high growth stock or have a lot of operating leverage in its business model. In order to fully understand whether BLX is a good investment for you, we also need to consider important company-specific fundamentals such as Banco Latinoamericano de Comercio Exterior’s financial health and performance track record. I urge you to continue your research by taking a look at the following: