If you are an investor who is interested in growth investing, you may likely be one with a high-risk profile and excited at the prospect of investing in high-beta stocks. This brings us to the question of what high-beta stocks are and how to identify them. Let’s begin with what the word “beta” means to understand “high-beta”.
What is Beta?
Beta is essentially an indicator of how risky a stock may potentially be. You may think that stock investing is a risky business, but some stocks are considered “riskier” (high-beta stocks) than others. Highly volatile stocks are considered riskier than those with low volatility. Beta is basically a measure of the volatility of a stock relative to a benchmark index or the wider market.
What are High-Beta Stocks?
When it comes to the identification of high-beta stocks, stocks that have a beta coefficient or value of greater than 1 are thought of as high-beta stocks. As they portray high volatility in the markets, they may be more popular with experienced traders and investors who don’t mind the risks but want the potential high returns.
Typically, high-beta stocks, NSE-wise or BSE-wise, are those that come from companies that may see high growth in the future. This is because these companies are generally the ones that are engaged in the production of goods and services with high demand and a high turnover.
Investing in High-Beta Stocks
Companies issuing high-beta stocks tend to be efficient at business management and possess sound fundamentals. They are the companies that show positive growth trends for the future.
Some stocks of small-cap and mid-cap companies may make the most of market advantages to raise their market capitalisation and the yearly rate of turnover. In turn, this increases the corresponding price of the stock. These companies may be the high-beta stocks you are looking for. High-beta stocks promote the growth of production in companies and generate more profit, making such companies even sounder for investment. Consequently, investors are compelled to invest in such stocks.
Examples of High-Beta Stocks
If you are thinking of investing in high-beta stocks, then you may look at the NSE (National Stock Exchange) for a choice of high-beta stocks to allocate your capital. In terms of high-beta stocks, NSE has some leading stocks mentioned below, along with the respective industry/sector:
|IndusInd Bank Ltd||Banking|
|Bajaj Finance Ltd||Finance|
|Bajaj Finserv Ltd||Insurance|
|Hindalco Industries Ltd||Metals|
|Tata Motors Ltd||Four Wheelers|
|Adani Enterprises Ltd||Commodities|
|State Bank of India||Banking|
|Axis Bank Ltd||Banking|
|Mahindra & Mahindra Ltd||Four Wheelers|
|Tata Steel Ltd||Iron & Steel|
You can find high-beta 50 stocks on the Nifty 50 Index as well, and the above-mentioned stocks are included in this index.
Who Should Invest in High-Beta Stocks?
In the Indian context, high-beta stocks may be considered for those investors who wish to grow their capital by investing in companies that promise growth. Such investors may be prepared to take certain levels of risk, but they may also have the opportunity to achieve high returns.
Since high-beta stocks come with a significant amount of potential risk, a downward market trend could mean losses for investors investing in such stocks. Markets spiralling downward have a crucial adverse effect on high-beta shares as there is a greater level of interdependence between high-beta stocks and the market itself.
Investors who are experienced in the ways the market works tend to seek opportunities to pool their capital in the investment of high-beta stocks since they are familiar with stock market volatility and well-versed in strategies to get around this. They are prone to understanding when to hold shares and when to sell them to mitigate risk. In case you are interested in high-beta stocks, NSE has a wide choice and you may do some due diligence analysis and research before investing.
The idea is to do research on every aspect of a company and then invest in the high-beta stocks of the said company so you know exactly how your investment may go. Since high-beta stocks have a significant weightage in the overall stock markets, they can either be potentially detrimental or positive for your portfolio in general.
The Advantages of High-Beta Stocks
There are some obvious advantages of investing in high-beta stocks, but there are some disadvantages that investors should be aware of. First, you can find out about the advantages listed below:
- A Shield Against Inflation: If you invest in high-beta stocks and they deliver high returns for you, they can be a safety net against the forces of inflation. Often, the long-term returns of high-beta shares may yield substantial amounts for investors which are higher than existing inflation rates in the economy.
- Substantial Returns: Related to returns and gains to beat inflation, high-beta stocks can give you good returns, especially when benchmark indices rise in value.
The Limitations of High-Beta Stocks
Once you know the answer to the question, “What are high-beta stocks?”, you should be aware that these have certain disadvantages too. These are highlighted below:
- Significant Risk: Any stocks that come with the chance of high returns, may pose high risks too. Stocks that have a beta coefficient of more than 1 are highly volatile in nature. That is to say, they have a higher level of responsiveness to fluctuations in the stock market. In simple words, if the stock market is down, even slightly, high-beta stocks may undergo substantial losses.
- Using Limited Parameters: Several investors make errors while choosing high-beta stocks, only considering the parameter of the value of the stocks against the markets. This means that investors may choose a stock based on its high-beta coefficient and nothing more. Although the performance of high-beta stocks may rely on the overall stock market, or say, high-beta 50 stocks of the Nifty 50 Index, the value of stocks depends on much more. A stock may fall in value (or rise in value) due to the way the business in the company it hails from is run, or any other variable other than overall stock market performance.
Final Words on High-Beta Stocks
Certain investors may seek the creation of wealth as their main goal of investment in the stock markets. If you are an investor who wishes to accumulate wealth and go along with potential risk factors, then high-beta stocks may match your financial goals. Still, as an investor, you must think of the performance of high-beta stocks as dependent, not just on benchmarks in the stock markets, but also on the company management and credentials from where the stock is issued. Assuming you have understood more about high-beta stocks, you may consider investment, and the first step towards this is to open a Demat account with Angel One.
Why are high-beta stocks considered more volatile than other stocks?
High-beta stocks may show more volatility simply because they are more sensitive to market fluctuations than other stocks may be.
What are High Beta Stocks?
High-beta stocks are those company stocks that are highly volatile and sensitive to market conditions. They exhibit beta coefficients of 1 or more.
Are there any advantages of investing in high-beta stocks?
High-beta stocks can deliver high returns, provided the companies they come from have sound fundamentals and the stocks correspond to stock market highs.
Is there a way to identify high-beta stocks?
You can make use of stock screeners or finance platforms to identify high-beta stocks. These online platforms provide you with beta values for different stocks. High-beta stocks are those with statistical coefficients of 1 or above.