Last Updated on Oct 18, 2022 by Aradhana Gotur
Wouldn’t it be great if you had an indicator of how risky a stock can be? It would make choosing a stock that best suits your risk appetite much simpler, right? Well, you do have such an indicator, and it is called ‘beta’. Does ‘high beta stocks’ ring a bell? If not, we’ll talk about it in a bit.
If you have the itch to learn more about this risk indicator and what are high beta stocks, jump right in. We have also drawn up a list of high beta stocks in Nifty 50 in the article 🙂
Table of Contents
Risk: the premise for high beta stocks
Stock investing is a risky business. But what comes without risk? Let us get this straight. Money only grows when invested. There’s no alternative to it. When you entrust your money to someone else to grow it, there is a risk factor associated with it. You may run into losses and have to accept lower-than-expected returns, or if the losses run too deep, you may not get your funds back at all.
So, does this stop you from investing? Mostly, no. You still invest in relatively low-risk instruments. Or you may diversify thoughtfully. The same goes for stocks. While some are highly volatile, others may not be as much. Higher the volatility, the more risky the stock is, and vice versa. So how do you ascertain the volatility of stocks?
Beta is a measure of the volatility of a stock.
What is beta in the stock market?
Beta is a statistical measure of a stock’s volatility compared to the broader market or a benchmark index. It is calculated using regression analysis, a statistical method used to find the relationship of a dependent variable with one or more independent variables. In the context of stock beta, the volatility in the broader market is the independent variable, and the risk associated with the stock is the dependent variable.
What are high beta stocks?
Shares with a beta value higher than 1 are high beta stocks. Simply put, these are relatively volatile and risky. And going by the risk-reward relationship, this stock can potentially give higher returns (but remember, high risk never guarantees high returns). That’s why investors looking to create significant wealth through shares go for stocks with high beta.
High beta stocks are usually issued by high-risk companies
Generally, small and midcap companies have a higher beta and are thus perceived to be risky. This is because companies having smaller balance sheets or fewer physical assets are more prone to economic disruptions than those with larger balance sheets. As such, the risk associated with a high beta stock can accelerate in times of economic turmoil and eat into your returns.
Let’s understand this with an example. In order to flourish, small and midcap companies need cheap credit and high demand, both of which can be scarce in times of economic turmoil. Once the economy shows signs of recovery—credit conditions get better, and demand picks up—the performance of these companies can also get better. (Note that this is not a prediction, nothing in the stock market is predictable. So, always do your due diligence before relying on market-related information from any source).
A note on small and midcap companies
Small and midcap companies are sensitive to macroeconomic factors. Therefore, any ongoing problem in the economy can almost immediately impact these stocks. Typically, such companies are risky businesses. They offer products that are in high demand and generate high turnover. Though their balance sheets are not large, the efficiency of their operations and internal management aid their growth and attract investors.
How to interpret the beta value of a stock?
Assign the benchmark index representing the overall stock market beta of 1. So if the beta value of a particular stock is higher than 1, it is more volatile than the overall market, which means that its price moves too frequently. And so it is considered relatively riskier. In contrast, a stock beta value lower than 1 is considered less volatile versus the market. Since such a stock is more stable, it is less risky. Here are three points that will help you make sense of beta in a better way.
Suppose Nifty 50 has a beta of 1. Here’s how to use a particular stock’s beta can be interpreted:
- Beta of less than 1: The stock is less volatile than the index. For example, if Nifty 50 moves down by 2.5%, the stock price falls at a lower rate.
- Beta equal to 1: The stock is as volatile as Nifty 50. If the index increases, the stock is also likely to increase at a similar pace, and vice versa.
- Beta of more than 1: The stock is more volatile compared to the index. For example, if Nifty moves up by 2.5%, the stock price increases at a higher rate.
Beta can also be negative!
In case the beta of a stock is negative, then the scrip is inversely correlated to the market. And the stock tends to move in the opposite direction. A high negative beta means more volatility in the price movement. For example, if Nifty moves up by 1.5%, the stock price falls by -1.25%.
Note that beta indicates a stock’s volatility and riskiness, not its price movement or the company’s relative strength.
NSE high beta stocks
|Name||Market Cap (in Rs. cr.)||Close Price (Rs.)||Beta|
|Indusind Bank Ltd||91,600.47||1,181.6||2.32|
|Bajaj Finserv Ltd||2,68,890.9||1,688.3||1.91|
|Bajaj Finance Ltd||4,39,010.72||7,272.5||1.90|
|Tata Motors Ltd||1,41,337.93||396.25||1.72|
|Hindalco Industries Ltd||88,987.32||397.15||1.71|
|Adani Enterprises Ltd||3,65,883.35||3,209.5||1.65|
|Axis Bank Ltd||2,45,945.66||800.5||1.51|
|Tata Steel Ltd||1,22,252.70||100.1||1.44|
|State Bank of India||4,70,504.91||527.2||1.37|
|Mahindra and Mahindra Ltd||1,47,079.73||1,230.3||1.34|
The above table is a list of 10 high volatile stocks in Nifty 50 as of 17th October 2022.
How to find the beta of Indian stocks?
You can find the beta of Indian stocks in 2 ways:
- Using the formula
- Using Tickertape’s Stock Screener
Finding the beta of a stock using formula
- Get the historical prices for the desired stock
- Get the historical prices for the comparison benchmark index
- Calculate % change for the same period for both the stock and the benchmark index. Here, the period can be daily, weekly, and so on
- Calculate the Variance of the stock
- Find the covariance of the stock to the benchmark
Now, Beta = Covariance/Variance
Finding beta of shares using Tickertape’s Stock Screener
Since manually calculating the beta of a stock is prone to errors, you can easily view the beta coefficient of stocks on Tickertape’s Stock Screener.
Follow these steps:
1. Visit Tickertape
2. Click on the screener and select “Start Screening”
3. Click on “Add Filter”
4. In the “Search for Filters” box, type ‘beta’ and click on done
5. The screener now returns stocks along with their beta value. Note that, if you are looking for stocks in a particular universe or sector, filter them accordingly by selecting your desired conditions on the left-hand side
Advantages of investing in high beta stocks
Help in wealth creation
Stocks with high beta carry higher risks and can generate high returns. Thus, investing in such stocks after careful evaluation and continual monitoring can help you create wealth.
Give high returns amid market upswing
Since a high beta stock is sensitive to economic conditions, it tends to perform well when the market is swelling.
Returns higher than inflation
Since stocks with high beta generate high returns, the figure may surpass the inflation rate in the country.
Demerits of high beta stocks
Though the beta of a stock signifies the volatility and risk associated with it, relying solely on it would not be a wise move. Here’s why.
Are relatively riskier
Stocks with a beta value of more than 1 are riskier as they are sensitive to market volatility. Ergo, a downturn in the stock market can impact such stocks leading to huge losses.
Have other associated risks
The beta coefficient is the rate at which the price of a stock moves when compared to the broader market index. While this is an important indicator of the volatility with respect to the stock, there can be other associated risks as well. Ergo, if you simply rely on the beta value of a stock to invest in it, you may be ignoring other red flags, such as inefficient management or operations.
Reliance on past data
The beta coefficient is calculated based on past data of stock. So it is a good indicator of the stock’s past performance but doesn’t guarantee future performance. Here’s why.
Assume that a well-established company has a beta of less than 1. If it avails a massive debt for expansion, the beta will not have accounted for this in the company’s risk profile.
The debt changes the company’s risk profile. What if the proportion of debt is higher than equity? Then the company’s debt-to-equity ratio will be higher than before. And if the company is unable to repay its debt on time, the creditors will have a higher stake in the company’s assets than its shareholders.
So, as a shareholder, you will be at more risk when a company avails debt. See how the story changes?
That is why relying on beta information alone may not be a good investment decision when evaluating a stock.
Should you invest in high beta stocks?
Now that you know the concept of beta and how to get the list of high volatility stocks, you may be wondering if you should invest in these stocks. Well, the answer solely depends on two factors:
- Your experience in stock markets
Seasoned investors have a better understanding of stock markets. They know to analyse market swings and use their observations to predict the market. They know when to enter and exit a particular stock and the extent of exposure to take on. Moreover, they analyse domestic and global market conditions when studying a stock. This makes seasoned investors better equipped to invest in a high beta stock. If you are a beginner and wish to invest in such stocks, it is highly important to study the markets first and only then venture out.
- Your risk tolerance and return expectation
Being a seasoned investor is not a prerequisite to investing in high beta stocks. As mentioned earlier, stocks with high beta are risky but can potentially generate high returns. Ergo, you should also be comfortable with taking a high risk. Moreover, you shouldn’t be demotivated when the market faces a crisis. Because, generally, when the market suffers, such stocks can fall hard. So you must be prepared to bear losses until the market recovers. It is even better to hold stocks for the long term.
If both these boxes are ticked, you can consider investing in high beta stocks.
There you go! By now, you may have understood what is a high beta stock, its merits and demerits, and whether you should invest in it or not. You also know how to get the list of high-volatility stocks using Tickertape Stock Screener.
Be mindful of not basing your investment decisions on the beta of a stock alone. Ensure to look at more than just the beta value. Evaluating the company’s internal management and conducting fundamental and technical analysis of the stock is equally important.
What is the beta of a stock?
The beta of stocks is a statistical measure of their volatility versus the market. The higher the volatility, the more risky the stock is, and vice versa.
What is the best beta for a stock?
There is no ideal or best beta for a stock. Since beta represents the stock’s volatility and riskiness, you should choose to invest in stocks in line with your risk tolerance. If you are an aggressive investor, you can consider stocks with a beta higher than 1. If you are a conservative investor, stocks with a beta lower than 1 may be suitable. But if you can take a moderate risk, you can consider a stock with a beta equal to 1.
Where can I find high beta stocks of NSE?
You can find NSE high volatile stocks using Tickertape’s Stock Screener. Simply launch the Screener and apply the ‘beta’ filter to the screener. Add other metrics as you wish. You can see a list of high beta stocks listed on the NSE.
If you want a list of high volatile stocks in Nifty 50, select the universe as Nifty 50.
Are low beta stocks risky?
Low beta stocks are less-volatile and so lend stability to a portfolio of stocks by compensating for losses of high volatility stocks. However, be mindful that stocks, by nature, are risky.