MintGenie Explains: How beta index measures volatility in stocks

Stocks that are impacted by changes in the stock market are known as volatile stocks. They are exposed to both systematic and unsystematic stock market risks. However, due to their high-risk, high return ratio, high volatility stocks are very well-liked and sought-after in the financial market. Equity shares of small and mid-cap corporations are few examples of volatile stocks.

The benefits of investing in volatile stocks are evident. The likelihood of better returns is greater. You’ll have a better chance of reaping higher gains if you invest in highly volatile companies. Furthermore, volatility has an effect on net profitability as well. In other words, if you want to make a significant profit from trading and investing, you must be willing to increase your profit margin, and the only way to accomplish this is to incur the risk of investing in companies that are prone to volatility.

What is the role of beta index in identifying volatile stocks?

With the help of the beta index, you might recognize a volatile stock. This index compares changes in the benchmark index with the effects of stock market variations on a particular share price. Since market fluctuations are proportionate to the changes represented by large corporations, shares with a beta value of 1 are regarded as a generally secure investment option.

A security that is comparatively more stable is a low beta stock i.e. has a beta rating below 1. Beta greater than 1 denotes significant volatility that coincide with market changes. Consequently, it is viewed as a risky investing instrument.

Therefore, high beta stocks i.e. stocks with beta value greater than one are associated with volatile stocks. They are easily impacted by slight changes in stock market indicators. In the present economic climate, every evidence of change raises concerns about a company’s performance. And as a result, there is a higher market demand for these assets’ acquisition or sale. Naturally, the trading of such stocks becomes more volatile.

Larger rewards on the upside are incredibly alluring, but if you’re going to take volatility into account, make sure you also take the size of loss into consideration. Imagine an even larger potential of loss if you can see a significant likelihood of gain.

High-risk investors who are knowledgeable about intrinsic value indicators and have a propensity for taking on risk might invest in highly volatile stocks to generate significant returns through capital gains. Investors should be able to read any changes in the stock market since they have a big impact on stock prices. To avoid that, investors are always advised to conduct their proper research before investing in volatile stocks.

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