Do you know the beta of the stocks you are trading in?
If no, should you make an attempt to know?

Let us understand what beta is and how can the stock’s beta be used to make meaningful trading/investment decisions

What is beta?

Beta is a ratio. The ratio of returns given by a stock to the returns given by the benchmark index.
Higher this ratio, the higher is the price volatility of the stock compared to the index (e.g. sensex)

If a stock has a beta lower than 1, this means that the stock will be less volatile compared to the sensex. A stock with higher beta will have more volatility compared to the index.

Beta and Returns

Stocks with high beta tend to give more returns in a uptrending market, however, they give large negative returns when the market is going down. A stock whose beta is 1.5 will give 50% higher returns in a bullish market and 1.5 times negative returns than those from sensex when the market is going down

Beta and Risk

Obviously, more returns cannot come without more risks. High beta stocks are riskly since they may result in the capital getting stuck in the market because of sharp negative returns if the market is going down.

Beta and you?

So, how do you use beta? Beta can be used profitably for short term trading decisions when the direction of the market and the overall sentiment is clearly known.

When the markets are going down, investors can park their money in low beta stocks and sectors like pharma and fmcg.

Traders can also minimize the risk and increase the gain by investing in fundamentally good high beta stocks

Related posts:

  1. Beta of Sensex Stocks
  2. The volatility index India VIX
  3. PSU Stocks tank after budget