What Is Alpha?

Imagine you're playing a video game where the goal is to score higher than the high score set by the game itself. In investing, Alpha is a bit like achieving a score higher than the game’s high score. It represents how much better your investment does compared to a standard set by everyone else, which in finance, we call the "market."

Alpha is a measure used by investors to find out how much more money they made on their investments compared to a usual benchmark, like a market index. Think of it as the "extra points" you earn over what you expected just by playing the basic game.

Along with Alpha, there’s another term called Beta. If Alpha is about how much better you performed compared to expectations, Beta tells you about how rough the game itself is. In other words, Beta measures how much risk or volatility is involved in the market or the investment. A higher Beta means the game is riskier or more unpredictable.

So, if an investor has a high Alpha, it means they did exceptionally well compared to the typical market performance. They didn’t just play the game; they beat the usual high scores by a good margin, which can be pretty exciting in investing. However, achieving a high Alpha usually involves smart and sometimes risky moves, just like in a challenging video game.