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    Join Date
    Aug 2011
    Lahore, Pakistan
    Blog Entries

    What is a high beta stock?

    Beta is a measure of risk of a stock or a portfolio of stocks. Stocks issued by companies have two types of risks called as systematic risk and unsystematic risk. Systematic risk is a risk that every company has to face or manage as these are almost common across companies. Risks such as change in interest rates, inflation and GDP are examples of systematic risk. Unsystematic risk, on the other hand, is unique to a company such as strike in the factory of a company, loss of customers etc.

    Every investor would love to manage these risks. However, it is not easy to do it. Unsystematic risk can be managed generally by diversifying. This effectively means that risk associated with one company can be reduced as more stocks are added in a portfolio. With addition of more stocks which have negative co-relation, unsystematic risks keep on falling and can almost be made very minimal.

    Systematic risk, however cannot be reduced as they are common for all companies. This means that every investor has to accept it. So how does one get to know about systematic risk? Beta is a measure of systematic risk. Beta measures movement in a stock price or portfolio with respect to movement in an index. Beta is expressed as a number. A stock having a beta of 1 means that it is likely to show the same price movement as shown by an index like Nifty, Dow Jones or FTSE, assuming that the stock is part of these indices.

    So what is a high beta stock? A high beta stock is a stock having beta more than one. As beta value increases and moves ahead, the riskiness of a stock changes. This means that at a beta of 1.5 a stock is more risky than another stock having beta of 1.4. However, beta of a stock is not constant and keeps on changing over a period of time. Result season or any significant event in a company can change beta of that company. High beta stock generally suits those investors who are ready to take more or higher risks.

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