In our previous blogs, we had discussed hedging your cash stock holding with a stock future, usually, everyone has a diversified portfolio and in uncertain markets even such portfolios are required to be hedged. With portfolios consisting of 14 to 15 stocks, one can not apply a single stock future hedging strategy. If we apply that strategy here, the number of stocks futures one needs to buy would also be higher. Naturally, it would mean a higher requirement of capital as well. So in uncertain times, what would be a better way to hedge a portfolio? And the answer is one can hedge a portfolio with the help of Nifty Future.
Remember, benchmark indices are considered to be a barometer of financial health of the country or economy. No wonder Benchmark indices are most followed and also have got a certain impact on the movement of stocks as well. To understand this concept of hedging, first one needs to understand the concept of Beta of the stock.
Beta of the Stock
Again the jargon like Beta and all may result in a novice player considering it a complex process. But again it is a very simple concept. Beta, which is denoted by the Greek symbol β, plays a very crucial concept in market finance as it finds its application in multiple aspects of market finance. Let’s try to understand it in a simple manner.
In a simple manner, the Beta measures the sensitivity of a particular stock with respect to the change in the benchmark indices. This means if a Benchmark Index (we would consider Nifty 50 as Nifty Futures is the most traded benchmark Index future) moves by 1 percent, how much movement is seen in that particular Stock.
Means if Nifty 50 Moves by 1 percent, what would be the likely movement of the stock? This gives us other questions like how risky is the particular stock ABC as compared to investing in benchmark indices? Or even the comparison of two stock beta levels would provide an answer to, how risky Stock ABC is as compared to Stock XYZ?
Now the beta of Nifty50 would always be +1 as it is the base. And if a stock has a beta of +1.20 it means, if Nifty Moves up by 1 percent, the stock moves by 1.20 percent. And if another stock has got a Beta of +0.70 then a one percent move in Nifty in either direction would result in 0.70 percent move in stock as well. Positive beta means the Stock would move in the same direction as the index. And negative beta would mean the move in the opposite direction of the index.
Following are a few of the examples of how to read the beta of the stock
Suppose the beta of a Stock is – 0.50 percent, it means if the Index moves up by 1 percent, such stocks would decline by 0.50 percent.
If we speak about the figures, are there any stocks with zero Beta? While theoretically it is possible, practically it is very difficult to find stocks with Zero Beta.
Now there would be a beta which is higher than Zero but less than +1. This means the stock would move in the same direction as the index; however the impact would be less as compared to index movement.
And higher than +1 beta would mean, if stock moves by 1 percent the Stock Movement would be higher than 1 percent. If the beta is +1.2, this means the stock Movement would be 20 percent higher than the index movement.