What is beta value of share and how it is useful for investor?

What is beta value of shares and how it is useful for investorWhat 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.

Also read: Best stocks to buy in India in 2013

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

What is beta value of shares and how it is useful for investor

Also read: New IPO's have performed well in last 6 months

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.

If you enjoyed this article, share it with your friends and colleagues through Facebook and twitter.

Suresh
What is beta value of shares and it is useful for investor

The Author

Suresh KP

Suresh KP i.e. me have written 1,800+ articles on this blog. I have done by B.Com from Osmania University and then MBA-Finance from Symbiosis University, Pune. I have over 20 years of experience in analyzing various investment options and money saving ideas. I love doing financial planning, Mutual Fund Analysis, Searching long term Stocks for wealth creation, IPOs, reviewing Insurance Products, analysing Health insurance Plans etc.

12 Comments

Add a Comment
  1. Hi suresh,

    i dont know anything abt shares ( nothing i know) but would like to invest in shares and request you yo provide your suggestion on the same.

    do we get anyone who invest on behalf of us and tell us when shares value goes up and down and when to sell the shares and when to buy the shares etc….

    please request you to guide me on this because very interested to invest on shares as it gives high returns …

    1. Venkat, before investing in shares, you should understnad how it works. Read our articles on stocks. Try investing in balanced mutual funds to start. This way you would understnad how they would work. Then you can invest in shares.

  2. Hi. Suresh from which website I can get beta value of all the stocks on daily basis and historical, pls advise.

     

    Thanks a ton

    1. Rajeev, They should be available at NSE and BSE. You can search there

  3. Hi Suresh, Nice article as always. I dont have much idea about stock market. If I understand correctly, stocks with beta > 1 will provide high return.

    Lets consider Dr Reddy Lab ( beta <1) and ICICI bank (beta >1). Now look at their past one year performances. ICICI bank provide return of 17 % and Dr. Reddy Lab gives about 42 % return (return data taken from Moneycontrol website). I dont understand this fact. How could it be possible. ICICI bank should give more return than Dr Reddy Lab. Could you please give some lights into it. Thanks Anupam

    1. Good observation Anupam. These are indicative to take a call on the stock and it does not mean that they behave exactly based on the ratios. e.g. Sensex increased by 18% in last 1 year. ICICI Bank provided 20% (as of this Friday), hence I feel there is a co-relation with beta values with sensex. However, Dr. Reddy’s has performed well compared to Sensex. These beta values are arrived based on historical data and the assumption can go wrong in case there is sudden change in business strategy. Dr. Reddy’s was underperformer in last few years, however now looks improving and it is good signal. I agree with your concern, but my suggestion is consider this as starting point and make a call. 

  4. until I read this article i was on the impression that Beta value is only for MFs… Glad that I got educated more with your articles.. I need to make a map on my portfolio with respect to beta values..

    Appreciate for posting such article.

    Regards,

    Kamal.

     

    1. Thank you Kamal for your feedback. Please let me know in case I am of any help in improving your financial decisions.

  5. Hi Suresh,

    Glad to see your post about stock market, please keep posting and it will help us to gain the knowledge.

    Thanks,

    Renganathan

Leave a Reply

Your email address will not be published. Required fields are marked *