High Beta Stocks: What are they and should you opt for them?
Beta is defined as the statistical measure of the relative volatility of a stock with respect to the broader market. It is usually interpreted as the risk level of the stock. So, when we say a particular stock has a beta of 1, we infer that the volatility of the stock is parallel to the market. High-beta stocks are those whose beta coefficient of greater than 1.
This implies that they have higher volatility and hence carry higher risk. In other words, historically, these stocks have given higher returns than the market but also lost more value when the market declined.
Generally, small and mid-cap stocks have high beta values. High beta stocks are attractive for experienced investors with higher risk tolerance and a strategy to profit from stocks that grow at above-average rates.
Benefits of High Beta Stocks
As compared to the broader market, high beta stocks are known to give higher returns to investors during a bull market.
Hedge against inflation:
High-beta stocks generate higher returns over time, and the returns are generally higher than the prevailing inflation rate in the country. This increases the investment value of the investor and protects their wealth against inflation.
Example of high beta stocks based on historical data
Axis Bank: A leading private sector banking and financial services company headquartered in Mumbai, Axis Bank had a beta coefficient of 1.32 as of August 2022.
Jindal Steel & Power: One of the largest primary steelmaking companies in India, JSPL has had its shares of ups and downs. But the company has been able to pull itself out of its financial struggle and had a beta coefficient of 1.65 as of August 2022.
Tata Motors: One of the most popular automotive stocks in India, Tata Motors has a diverse portfolio across vehicular segments and markets. The company is backed by the named Tata Group. It had a beta value of 2.09 in August 2022.
Who should Invest in High Beta Stocks?
Investors looking for higher-than-market returns and do not mind some risk exposure should go for high beta stocks. New investors or investors who are still understanding the stock market are not recommended to invest in high beta stocks.
High beta stocks have a very high interdependence between the stocks and the stock market. With the market going down, all shares in the investor’s portfolio will take a hit but the stocks with a beta coefficient higher than 1 will take a substantially greater hit. A seasoned investor who understands the market comprehensively has a better chance at predicting the market’s dips and rises. This gives them a better understanding of when to hold a share and when to relinquish it. With thorough research and experience in the stock market, high beta stocks are a good investment opportunity for such seasoned investors.
The beta coefficient measures the volatility of a stock compared to the broader market. Stocks with a beta coefficient greater than 1 are called high beta stocks. While high beta stocks do give higher returns during an upswing in the market, it also leads to significant losses during a market downfall. So before investing in such a stock, one must understand the stock market, their risk appetite and also continuously balance their portfolio with low-risk stocks.
Q. Do high beta stocks always mean high returns?
High beta stocks bring a possibility of relatively higher returns than the market average during an upswing. But with this positive possibility also comes a possibility of steeper falls than the market average during a downswing. The returns from high beta stocks are subject to risk and market conditions and hence it cannot be concluded that they always bring high returns.
Q. What are the high beta stocks in India as of August 2022?
There are numerous high-beta stocks in India; a few of the high-beta stocks NIFTY has listed are Adani Ports & SEZ, Canara Bank, Delta Corp, Ashok Leyland, Apollo Tyres and DLF.
Financial instruments that are held for 12 months or less are considered as short-term investments. These are instruments that can typically be converted into cash easily.