Table of Contents
Top Things to Remember Before Making Investments in High-beta stocks
What are the Advantages of Investing in High-beta stocks?
What are the Disadvantages of High-beta stocks?
How is Risk Measured by High-beta stocks?
When it comes to investment risk and returns are related closely. These two terms are uttered in the same breath. Generally, it is said that if one has to get higher rewards higher risks have to be taken. There are plenty of investment opportunities in the stock market of India. High-beta stocks are one of the investment options among the many that are on offer. To put it simply, High beta stocks show higher-than-market volatility. This indicates that the risk-loss ratio and the risk-reward of these types of stocks are regarded to be higher than that of the rest.
Read on to find out all about High-beta stocks, their pros and cons, investing in these types of stocks, what investors can gain from these stocks and how it helps measure risk.
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What are High-beta stocks?
Benchmark indices like BSE SENSEX and NSE Nifty50 represent the stock market of India. Beta measures the extent to which the price of the share of a company will move upon the movement of the market index.
High-beta stocks happen to be all those stocks having a beta higher than 1.0. It indicates that these stocks have a higher degree of price movement. But these are more volatile which makes them seem lucrative to investors who are trying to make quicker gains within a short span of time.
Also read: How Has the Indian Stock Market Performed in the Last 10 Years?
Top Things to Remember Before Making Investments in High-beta stocks
Investors need to have a high-risk appetite in order to make investments in High-beta stocks. Those who plan to put their money on these stocks must get comfortable with a high degree of price movement. Such kinds of swings are not simply restricted to the bullish market. Naturally, these can prove to have detrimental consequences in the bearish market.
In order to make investments in these stocks, it is important for investors to have a robust idea about the basics of a company and its outlook for the future. A lot of investors try to diversify their portfolio in order to deal with the risk of making investments in High-beta stocks.
In the stock market, it is impossible to avoid systematic risk. However, with investments in low-beta stocks, such type of risk can be reduced. This technique is also referred to as ‘risk-hedging’. Making investments in undervalued High-beta stocks is another smart strategy.
What are the Advantages of Investing in High-beta stocks?
High-beta stocks can give more returns over a span of time. These can actually offer much higher returns. If there is inflation prevailing in a nation these types of stocks can act like a hedge against it.
But it is important to note that these are not appropriate for all kinds of investors and one most invest in them with more caution.
What are the Disadvantages of High-beta stocks?
While the potential for returns is larger in case of high beta stocks there is also a higher level of risk associated with these securities. If you want to invest on these stocks, you need to keep in mind that there is as much risk of loss as there is opportunity to gain.
Beta happens to be a responsive metric. In other words, new information is not factored in here. This only indicates the extent to which a stock will respond to the movement of the market index. It does not show whether the price movement of the stock will be downward or upward. Naturally, it is not that useful while making an evaluation.
High-beta stocks are not appropriate for all kinds of investors, particularly those who tend to avoid risks or those planning to invest for quite a long duration. It is important to note that other kinds of assets or stocks might fit their investment objectives better.
How is Risk Measured by High-beta stocks?
Beta measures how much volatile a single stock is. It also measures the ‘systematic risk’ that is impossible to be mitigated. This is an inherent risk in the stock market, where geopolitical and economic factors lead to movements, thereby making it impossible to avoid volatility.
A thorough comparison of the beta of different stocks can be useful for investors who are risk-averse by nature. They can easily determine which stock is more appropriate to their style of investment and take decisions accordingly. Beta values can be checked out by aggressive investors in order to filter out stocks that move slowly. They can concentrate on volatile stocks to make gains over the short-term.
FAQs on High-beta stocks
Here are some frequently asked questions about High-beta stocks:
1. Are high beta stocks more volatile?
High-beta stocks are actually more volatile than benchmark indices. These indices are said to have a volatility of 1.0 whereas the volatility of High-beta stocks is more than 1.0. These types of stocks can offer high returns although a high amount of risk is also involved.
2. How are High-beta stocks different from low-beta stocks?
High-beta stocks are typically risky in form but come with the potential for higher returns. In comparison, low beta stocks have lower amount of risk but the return potential is lower.
In Bull markets, high beta stocks can outperform but in bear markets it can be a different story altogether.
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3. Who should make investments in high beta stocks?
Generally, High-beta stocks witness investments from investors who are experienced and have a high risk-appetite. They want to make high capital gains and are always in search of making fast profits from fluctuating share rates. These types of stocks need a lot of active management, given that these are extremely market-sensitive.
Also read: Stock Market Manipulation in India 2024: Top Things to Know About.
Conclusion
When looked at from the perspective of potential upside, High-beta stocks appear to be quite lucrative for investment. However, investors must also remember that the downturns can be equally damaging will it comes to losses. Therefore, before making any stock investment, they need to carry out a deep analysis.
It is ultimately essential for investors to distinguish between short-term risk (where volatility and beta can be advantageous) and long-term risk (where a better idea can be formed from the risk factors involved in the big picture).
