Wouldn’t it be great if you had an indicator of how risky a stock is? It would make choosing a stock much simpler, right? You would pick one that best suits your risk appetite and minimise your losses. Well, you do have such an indicator and it is called beta. A beta value of a stock suggests the extent of its volatility as compared to the broader market.
Talking of beta, you may have heard about high beta stocks. And if you have the itch to learn more about this risk indicator of stocks and also what are high beta stocks, you have come to the right place. Let’s jump right in.
This article covers
Risk: the premise for high beta stocks
Stock investing is a risky business and that’s true. But what comes without risk? Let us get this straight. Money only grows when invested. There’s no alternative to it. Naturally, when you entrust your money to someone else with a view to grow it, there is a risk factor associated with it. You may either not get your funds back at all or may have to accept lower than expected returns on it.
So, does this stop you from investing? No. You still invest in instruments that are relatively less risky. Or you may diversify thoughtfully. Same goes for stocks. While some are highly volatile, others may not be as much. The measure used to ascertain the risk associated with stock is beta.
What are high beta stocks?
Shares with a beta value or coefficient higher than 1 are high beta stocks. Simply put, high beta stocks are very risky. But it is a well-known notion that risk and returns are directly related to each other. As such, even though high beta stocks are risky, they have the potential to generate high returns as well. That’s why investors looking to create significant wealth by investing in shares, go for high beta stock.
Here’s some technical information, if you will.
What is beta in a stock?
Beta is a statistical measure of a stock’s volatility compared to that of the broader market. 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 high beta stocks, the risk associated with stock is a dependent variable and the volatility in the broader market is the independent variable.
Significance and shortcomings of the beta value of a stock
A beta of 1 signifies that a stock’s volatility is parallel compared to the broader market or a related benchmark index. The stock in question will mostly move alongside the benchmark index. A beta higher than 1 means that the stock would be more volatile and rise more than the benchmark index in a bullish market. Conversely, a beta of lower than 1 signifies lower volatility and would fall less than the index in a bearish market.
Beta relies on past data. This makes it a good indicator of the past performance of the stock but doesn’t guarantee that the same trend would continue in the future. Let’s understand why. Assume that a well-established company, whose beta is less than 1, avails a huge debt for its expansion. Now, the beta accounts for the company’s risk profile before it took on the debt and not after the new development.
But the debt that the company has taken on adds to its risk. What if the proportion of debt is higher than the equity? It shows that the company’s debt-to-equity ratio is high. And if the company is unable to repay its debt on time, the creditors will have a higher stake on the company’s assets than its shareholders. As a shareholder, you will be at risk. See, how tables turn? That is why relying on beta information alone may not be a good investment decision when evaluating a stock.
High beta stocks are usually issued by high-risk companies
High beta stocks are typically those issued by small and midcap companies and are thus perceived to be risky. This is because companies having larger balance sheets or more physical assets are generally in a better position to survive economic disruptions than those with smaller balance sheets. As such, the risk associated with high beta stocks may 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 are scarce now, since the economy is hit by the pandemic. Once the economy shows signs of recovery—credit conditions get better and demand picks up—the performance of small and midcap companies could 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 coming 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. Small and midcap companies are usually 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. Such steady inflow of funds via equity and debt fuel small and midcap companies and create high beta stocks.
Read more about how companies are classified into smallcap, midcap, and largecap stocks here. EQ is one of the NSE stock series that allows equity delivery and intra-day transactions. Learn more about NSE stock series here.
NSE high beta stocks list
Here is a list of high beta stocks in Nifty 50:
|Adani Ports and Special Economic Zone Ltd.||ADANIPORTS||EQ|
|Adani Power Ltd.||ADANIPOWER||EQ|
|Apollo Tyres Ltd.||APOLLOTYRE||EQ|
|Ashok Leyland Ltd.||ASHOKLEY||EQ|
|Axis Bank Ltd.||AXISBANK||EQ|
|Bajaj Finance Ltd.||BAJFINANCE||EQ|
|Bajaj Finserv Ltd.||BAJAJFINSV||EQ|
|Bandhan Bank Ltd.||BANDHANBNK||EQ|
|Bank of Baroda||BANKBARODA||EQ|
|Bharat Heavy Electricals Ltd.||BHEL||EQ|
|Bharat Petroleum Corporation Ltd.||BPCL||EQ|
|Can Fin Homes Ltd.||CANFINHOME||EQ|
|Cholamandalam Investment and Finance Company Ltd.||CHOLAFIN||EQ|
|Edelweiss Financial Services Ltd.||EDELWEISS||EQ|
|Equitas Holdings Ltd.||EQUITAS||EQ|
|Federal Bank Ltd.||FEDERALBNK||EQ|
|Godrej Properties Ltd.||GODREJPROP||EQ|
|Hindalco Industries Ltd.||HINDALCO||EQ|
|Hindustan Petroleum Corporation Ltd.||HINDPETRO||EQ|
|Housing Development Finance Corporation Ltd.||HDFC||EQ|
|ICICI Bank Ltd.||ICICIBANK||EQ|
|ICICI Prudential Life Insurance Company Ltd.||ICICIPRULI||EQ|
|IDFC First Bank Ltd.||IDFCFIRSTB||EQ|
|Indiabulls Housing Finance Ltd.||IBULHSGFIN||EQ|
|IndusInd Bank Ltd.||INDUSINDBK||EQ|
|JSW Steel Ltd.||JSWSTEEL||EQ|
|Jindal Steel & Power Ltd.||JINDALSTEL||EQ|
|L&T Finance Holdings Ltd.||L&TFH||EQ|
|LIC Housing Finance Ltd.||LICHSGFIN||EQ|
|Mahindra & Mahindra Financial Services Ltd.||M&MFIN||EQ|
|Manappuram Finance Ltd.||MANAPPURAM||EQ|
|Max Financial Services Ltd.||MFSL||EQ|
|Motherson Sumi Systems Ltd.||MOTHERSUMI||EQ|
|Muthoot Finance Ltd.||MUTHOOTFIN||EQ|
|Piramal Enterprises Ltd.||PEL||EQ|
|Power Finance Corporation Ltd.||PFC||EQ|
|RBL Bank Ltd.||RBLBANK||EQ|
|Radico Khaitan Ltd||RADICO||EQ|
|Shriram Transport Finance Co. Ltd.||SRTRANSFIN||EQ|
|State Bank of India||SBIN||EQ|
|Steel Authority of India Ltd.||SAIL||EQ|
|Tata Motors Ltd.||TATAMOTORS||EQ|
|Tata Steel Ltd.||TATASTEEL||EQ|
|Ujjivan Financial Services Ltd.||UJJIVAN||EQ|
|Vodafone Idea Ltd.||IDEA||EQ|
EQ is one of the NSE stock series that allows equity delivery and intra-day transactions. Learn more about NSE stock series here.
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 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 calculating beta of stock manually is prone to errors, you can easily view the beta coefficient of stock on Tickertape’s stock screener.
Follow these steps:
1. Launch https://www.tickertape.in/
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 stock names 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
Should you invest in high beta stocks?
Now that you have the high beta stocks list and know how to get the beta coefficient of these stocks, you may be wondering if you should invest in these stocks. Well, the answer solely depends on two factors:
1. 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 also the extent of exposure to take on. Moreover, they also analyse both domestic and global market conditions as pointers when studying a stock. This makes seasoned investors better-equipped to invest in high beta stocks.
2. Your risk tolerance and return expectation
But being a seasoned investor doesn’t make you qualified to invest in high beta stocks. As mentioned, high beta stocks are risky but can potentially generate high returns. Ergo, you should also be willing to take high risk in order to enjoy high returns or create substantial wealth. If both these boxes are ticked, you can consider investing in high beta stocks.
But before investing in high beta stocks, you should also be ready to take what follows. For instance, if the market suffers due to an economic downturn, you must be ready to bear losses until the market recovers following the economic revival.
Merits of investing in high beta stocks
Investing in high beta stocks helps in the following ways:
- Wealth creation: high beta stocks carry higher risks and can generate high returns. Thus, investing in such stocks after careful evaluation and continual monitoring can help you create wealth
- High returns amid market upswing: since high beta stocks are sensitive to economic conditions, they tend to perform well when the market is swelling
- Returns higher than inflation: since high beta stocks generate high returns, the figure may surpass the inflation rate in the country.
Demerits of high beta stocks
Though the beta of a stock suggests the risk associated with it and aids in making smart investment decisions, relying solely on it would not be a wise move. Here’s why.
- High risk: stocks with beta value or more than 1 are highly risky as they are extremely sensitive to market volatility. Ergo, a downturn in the stock market can impact such stocks leading to huge losses
- Other than market 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
- Relies on past data: the beta coefficient is calculated based on past data of stock. Thus, it is no good indicator of the future, meaning, it doesn’t guarantee the same or similar price movements in the future. Therefore, investing in high beta stocks solely based on their beta value would not be a good investment decision
There you go! By now you may have understood what are high beta stocks, their merits and demerits, and whether you should invest in them or not. Also, when investing in high beta stocks, ensure you 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 to minimise the associated risks.