What are high beta stocks
What does the beta factor mean in trading?
When retail investors are looking for the safest possible stocks, they look to the beta factor. Behind this is a key figure that is used as a yardstick for the fluctuation range. The beta factor shows how much a fund or a share moves compared to the overall market. This allows investors to pick the most stable stocks. This is easy on the depot and, above all, on your nerves.
Calculation and background beta factor
In order to put the range of fluctuation of individual values in relation, one needs the range of fluctuation of the entire market. This is referred to as a market portfolio in which every value is included. The average fluctuation is calculated accordingly. Individual stocks are then put in relation to the result.
The beta factor is used here, which serves as a benchmark and has the value 1. A security with a beta value greater than 1 is therefore subject to greater fluctuations than the market on average. If the beta is less than 1, the prices move less than the market. Investors looking for low-fluctuation investments should therefore only buy stocks with a beta factor lower than 1.
Implementation and use of beta factor
Usually, the purchase decision does not have to depend on the beta factor. Other factors should also be taken into account. Investors can find reasons for buying a share through fundamental analysis. Alternatively, the chart technique can also provide important signals for entry. Still, the beta is a good indicator when there are similar stocks to choose from. Then investors can choose the securities that are less prone to volatility according to the beta factor.
Of course, the beta values are only based on past data. A sudden change in a sector can make a stock volatile more than before. The beta factor should be used as a guide. With its help it can be estimated how great the fluctuation range will probably be in the future.
Beta factor for investments
The values of the beta factor are always positive and theoretically start at 0. A value of 1 has the same volatility as the overall market. If the value is above this, the security fluctuates correspondingly more strongly. For example, a stock with a beta factor of 5 fluctuates 5 times as much as all stocks on average.
But not only stocks are rated with the beta factor. Funds can also be broken down to this value. This enables investors to estimate how risky a fund is and what fluctuations are to be expected. Low-risk funds that generate stable returns of a few percent each year will therefore have a low factor. Risky investments, on the other hand, are characterized by a high beta factor. As an investor, it must be clear to you that a high value enables high profits as well as large losses.
That is why speculators make the size of their investment dependent on the beta factor. Play money for unsafe ventures can be risked in high beta stocks or funds. In contrast, a lower beta factor is recommended for long-term asset accumulation.
January 2021: Top investor Mohnish Pabrai puts everything on "one" cardBuffett disciple Mohnish Pabrai takes portfolio concentration to extremes: Value manager wants to make his customers happy with just two stocks ›read more
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