What is beta value of shares and it is useful for investor?
Stock markets have been volatile. Last Friday, Stock market jumped 200+ points amidst of this. However if your stock has not moved in positive direction, while there could be some technical or fundamental reasons, one more factor which would have influenced is the Beta value of your share. One of the important measurements of stock volatility in comparison to benchmark index or indices is beta value of the stock. Several analysts consider this as one of the major parameter while recommending the stock to the investors.
What is Beta value of the share?
Stock beta value would be indicated as 1. Based on the volatility of the stock, the number could be either less than 1 or equal to 1 or more than 1. BSE or NSE would compute these beta values by considering an year data. The beta values of the share can be broadly classified into 3 categories 1) Bet value of more than one; 2) Beta value equal to one 3) Beta value less than one.
a) Beta value of share more than one (>1)
Stocks that show higher volatility in comparision with index or indices has high beta of >1.
Positive factor: These stocks are potential to offer higher gains over long run in comparison with indices.
Negative factor: High beta value indicates high degree of volatility and low liquidity. Falling stock market can bring down such stock prices drastically.
When you should consider beta value > 1 stocks: When you think that stock market blood bath is almost done or during stock market corrections, buying these stocks could provide excellent returns in long run.
b) Beta value of share less than one (<1)
Stocks that show less volatility in comparision with index or indices has low beta of <1.
Positive factor: These stocks have less volatility and high liquidity. Major blue chip stocks would fall under this category.
Negative factor: These stocks provide low returns in comparison with indices.
When you should consider beta value < 1 stocks: You should buy these stocks when stock market is raising month on month or when stock market has reached its peak level, but you still think of investing. In case of any stock market corrections after you made investment, as your stock’s beta value is less, your stock price may not fall the way index is falling. It could be on the lower side. Investors who have less risk appetite or want to invest in large cap or blue chip stocks can invest in such low beta value stocks.
c) Beta value of share equal to 1 (=1)
Stocks that has equal volatility in comparison with index or indices has beta value of 1.
Positive factor: These stocks offer more or less same gains in comparison with indices.
Negative factor: In the last 3 years, stock market has not gone anywhere. Hence investing in such stocks would not provide any scope for returns.
When you should consider beta value > 1 stocks: In case you think that you should get returns from your stock in-line with stock market returns, you can consider these stocks.
How does this work exactly?
Let us consider some examples.
Sun Pharma Beta value is 0.45. Means if SENSEX is rising by 1%, Sun Pharma stock would raise only 0.45%. The number indicated may not be the same exactly on day to day basis. This average is computed by NSE / BSE by taking one year data. Hence you may see some relative comparison. Similary considering one more example, ICICI Bank has 1.46 Beta value. If SENSEX is rising 1%, ICICI Stock price would be up by 1.46%. Sounds interesting right?
BSE SENSEX Beta values as on 23-Aug-13 is shown below
Why beta value of stock needs to be considered before buying a stock?
Any investors would fall in two categories. High risk or low risk investor. These beta values of share would help an investor to choose the stocks based on risk appetite. This is one of the factors in choosing the stock beyond fundamentals and technical analysis of a stock.
Conclusion: Beta value of the share plays important role in choosing a stock. If you are high risk investor, during stock market correction, investing in high beta value stocks would provide excellent returns in long run. Similarly, if you are low risk investor, investing in low beta value stocks would help you in minimizing the erosion of your investment value during stock market corrections. However such investors can expect moderate or low returns.
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What is beta value of shares and it is useful for investor