What are High Beta Stocks?
Share market instruments having a beta coefficient of greater than 1 can be classified as high beta stocks. Such investment tools are popular among experienced investors, looking to create substantial wealth through stock market investments. Even though manifold returns can be generated by investing in stocks having a beta value of higher than 1, the risk associated with such stocks is also high.
Generally, equity stocks issued by small and mid-cap companies have a high beta value. Such businesses often produce items which are in high demand in an economy, ensuring high turnover and revenue generation reports. These sound financial statements, along with efficient management of a business, instil confidence among investors in a country regarding the expansion and growth of the company in the future, thereby encouraging them to invest their capital. Access to a steady flow of credits through equity and debt tools lead to the creation of high beta stocks.
Shares of small and mid-cap companies can reap considerable market advantage to increase their market capitalisation and annual turnover rate, which, in turn, raises the corresponding share price. High beta shares of such companies allow businesses to increase production levels and respective profits, subject to favourable market conditions.
Who should Invest in High Beta Stocks?
High beta Indian stocks are ideal for investors looking to increase their wealth by investing in high potential growing companies. Such individuals can be classified as risk-prone, as they readily assume substantial risk to enjoy high returns on total investment.
In case of a downward swing of the share market, investors can bear significant losses on their total portfolio of investment as such variations have a substantial impact on high beta shares, having a coefficient value of higher than 1. This can be attributed to a higher degree of interdependence between the stock market and relevant shares.
Experienced investors often look for options to pool their funds in high beta stocks, as they are well versed with the fluctuations of the stock market and the strategies to navigate them. They often know when to hold and when to relinquish their shares to ensure minimum their capital is exposed to minimum risk. Ergo, high beta stocks are most suited for seasoned investors. Thorough research and analysis of the market is required in this respect, to predict the direction of share market swings carefully. Multiple parameters inclusive of internal management of a company and conditions prevailing both domestically within a country as well as the global scenario has to be evaluated to ensure high returns from the total investment.
Advantages of High Beta Stocks –
- High returns
High beta stocks list is known to increase the wealth of an individual through substantial return rates on equity. Such yield can be experienced during an upswing of the stock market when benchmark indices are rising in value. Any minor change in such index values lead to a significant rise in the price of a high beta stock, and thereby, increase in the portfolio investment value.
- Hedge against inflation
High beta stocks generate returns which are significantly higher than the prevailing inflation rate in the country. This implies that the real value of total investment will rise, indicating a significant rise in the purchasing power of individual investors.
Limitations of High Beta Shares
- High risk
Stocks having a high beta value (β>1) are extremely volatile, as they have a higher degree of responsiveness to market fluctuations. As a result, any downturn of the stock market can lead to substantial losses for investors, as a slight fall in benchmark points can lead to significant fall in the market value (price) of corresponding high-value securities.
- Only considers market risks
Beta coefficient records the rate at which a stock price performs when an underlying benchmark index fluctuates. Thus, people get an accurate estimation of the rate at which their stock will perform with respect to the overall performance of the stock market. Only unsystematic risk parameters such as stock market conditions and state of an economy are considered for such calculations.
As a result, investors often run the risk of falling into a value trap, if the beta coefficient is the only parameter considered before choosing ideal securities for investing. Even though a benchmark index value rises over time, the value of relevant securities might fall due to faulty management of a business, or failure to meet production targets.
Individuals can choose to invest in high beta shares if wealth accumulation is their primary goal, irrespective of associated risk factors. Shares, having beta higher than 1, are expected to generate returns in excess of performance of benchmark indices, provided the internal management of the company is sound. To mitigate such high risks rates, additional technical analysis through other corresponding terms can be undertaken.