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If you're interested in Odfjell Drilling Ltd. (OB:ODL), 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. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the 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 are more sensitive to general market forces than others. 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. Any stock with a beta of greater than one is considered more volatile than the market, while those with a beta below one are either less volatile or poorly correlated with the market.
View our latest analysis for Odfjell Drilling
What does ODL's beta value mean to investors?
Given that it has a beta of 1.33, we can surmise that the Odfjell Drilling share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, Odfjell Drilling 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 Odfjell Drilling is growing earnings and revenue. You can take a look for yourself, below.
Does ODL's size influence the expected beta?
Odfjell Drilling is a small company, but not tiny and little known. It has a market capitalisation of øre5.8b, which means it would be on the radar of intstitutional investors. It has a relatively high beta, which is not unusual among small-cap stocks. Because it takes less capital to move the share price of a smaller company, actively traded small-cap stocks often have a higher beta that a similar large-cap stock.
What this means for you:
Since Odfjell Drilling tends to moves up when the market is going up, and down when it's going down, potential investors may wish to reflect on the overall market, when considering the stock. In order to fully understand whether ODL is a good investment for you, we also need to consider important company-specific fundamentals such as Odfjell Drilling’s financial health and performance track record. I highly recommend you dive deeper by considering the following: