Stock Market Glossary
Alpha
Excess return of an investment compared to its benchmark index.
In brief: Excess return of an investment compared to its benchmark index.
Meaning in practice
Alpha measures how much better or worse a strategy has performed compared to its benchmark – adjusted for risk. Positive alpha is rare and difficult to reproduce over long periods of time; that’s why passive investing works better for most investors.
Context for investors and traders
For traders, this term is most useful when preparing and executing an order. Its meaning depends on the venue, liquidity, time frame and order type. A single reading is not a reliable buy or sell decision.
How to use this in practice
In practice, the term should be linked to a specific trading plan: entry, exit, position size and costs belong together. In short time frames, spread, slippage and delayed execution can quickly outweigh the theoretical benefit of an observation.
What to keep in mind
Write down which observation confirms or invalidates your assumption before trading. This keeps the term a decision-making tool rather than a retrospective justification for risk already taken.
