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High Beta Stocks



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What is Beta?

Beta is a term we hear often in stock markets.

They say, go for high beta shares when you are into trading.

Now, what is the meaning of this term - Beta?

We know that, in stock market, prices of stocks move up and down.

This up and down moment is called volatility.

Beta is a measure of the volatility of a stock.

This means, it tells us how easily the price of the stock moves up and down in a given time frame (usually intraday or within a given timeframe).

High beta stocks move on upside and downside (often abnormally) more compared to low beta stocks.

This means that high beta stocks are often moves and get price changes more often compared to low beta stocks are slow movers.

High beta is generally a good sign of high popularity because they are mostly preferred by traders and investors alike.

Examples of High Beta shares are Apollo Tyres, RCOM, Omkar Chemicals etc.

Eamples of Low Beta shares are Apollo Hospitals, HCL Tech etc

Is there any range for beta of a stock?

Theoretically speaking, there is no specific range.

For comparison reasons, the beta of the base index, such as Nifty, is taken as 1.

A beta of less than 1 means that the security is theoretically less volatile than the market.

A beta of greater than 1 indicates that the security's price is theoretically more volatile than the market.

For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.

How to get beta value of stocks?

Two sources:

1. Economic Times is a good source of information to get Beta data.

It not only shows the current beta value but also for 1-month, 3-months, 6-months, 1-year and 3-years

This data is important because we should prefer stocks with consistently high beta and not just in recent past.

http://economictimes.indiatimes.com/omkar-speciality-chemicals-ltd/stocks/companyid-33231.cms

Its beta is 0.44

Beta value more than 1 means it is a high beta.

So, this is a low beta stock and is not as reactive as the Index.

2. TopStockResearch.com (for some stocks)

http://www.topstockresearch.com/INDIAN_STOCKS/TYRES/Apollo_Tyres_Ltd.html

Its beta is 1.17

So this is a high beta share as well.

Now let us check if RCOM is a High beta stock or not

http://www.topstockresearch.com/INDIAN_STOCKS/TELECOMMUNICATION_SERVICES/Reliance_Communications_Ltd.html

Beta is 1.55

Now, assuming OmkarChem, Apollo Tyres and RCOM are all fundamentally good stocks, we prefer RCOM because of its high beta value.

High beta is more important for intraday traders and scalpers.

Important: Source the beta values from the same source (either EconomicTimes or TopStockResearch or your favourite website). In the above example the beta value of OmkarChem was taken from EconomicTimes and the other two from TopStockResearch just for explanation.

Who calculates Beta?

Beta value is calculated by websites and not generally by stock exchanges.

So not all websites report the same beta value every day.

Hence follow one source for all beta data.

For instance, I would prefer beta value from EconomicTimes.

How often is Beta value calculated?

Beta Value is calculated every day.

So if you trade in several company stocks daily, it is better to check it every day.

But, since we are mostly investors, checking them at the entry stage i.e buying for the first time is sufficient.

When building a portfolio, there is no need that all stocks being selected be high-beta.

Companies from some sectors are traditionally low-beta.

Also if all stocks in your portfolio are high beta, you would get hit harder in a falling market.

So, in order to have a proper balance, make a good mix of high-beta and low-beta companies.

Checking beta score of your portfolio on a weekly basis would be just fine.

Finding Quality High Beta stocks

We know that the stock prices move because of various factors.

It so happens that some stocks will be dull and side-wise and because of some news, they suddenly become volatile.

Now, these once-in-a-while stocks cannot be said to be high beta and might not fit our criteria.

NSE maintains and tracks a list of quality high beta stocks in the form of an Index.

Remember, Index is a collection of stocks.

This index is a strategy index called - NIFTY High Beta 50 Index

So this index is a collection of 50 stocks that trade on NSE.

In order to make the 50 stock index investible and replicable, criteria’s such as turnover and free float market capitalization are applied while selection of securities.

The methodolody for the identification of such high beta stocks is available at https://www.nseindia.com/products/content/equities/indices/strategic_indices.htm

The list of companies that are part of the index will be available at https://www.nseindia.com/content/indices/nifty_High_Beta50_Index.csv

It may make sense to invest or hold one high beta company from the list for the long term (provided it also meets our other investing rules).

Finding Low Beta Stocks

Some investors prefer companies whose price-wise volatile wont be that high.

NSE has an index called NIFTY Low Volatility 50 Index that aims to measure the performance of the least volatile securities listed on NSE.

In order to make the 50 stock index investible and replicable, criteria’s such as turnover and free float market capitalization are applied while selection of securities.

More details of the index can be found at https://www.nseindia.com/content/indices/Factsheet_nifty_Low_Volatility50.pdf

Other points

  • Intraday traders could see the beta value when doing the homework or just before entering the trade.

Conclusions

  • With this lesson, we will frame our rule #24: Check beta value of the stock to understand the stock volatility.

Assignment

  • Open your demat statement. For each of the stock you are invested in, find its beta value.

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