You must have often heard that the stock market is volatile. This term is used for the Indian stock market, as stocks fluctuate in price in real time. Although stock volatility seems like a negative factor, it is one of the main reasons investors make profits. Without volatility, the stock price will be stagnant and won’t rise above your cost price. Hence, investors analyse stocks based on their volatility and consider investing in the most volatile stocks after extensive fundamental and technical research.
If you are looking to invest for the short term, you may benefit from understanding volatile stocks and how you can use stock volatility to make profits.
Read more: Mid-cap stocks
What are volatile stocks?
Volatile stocks witness high price fluctuations in short periods. Such stocks change in price in real time, providing investors with a way to use the rapid price fluctuations to make quick profits. However, volatile stocks can also result in losses if the fluctuation is negative and the share price falls below the cost price.
Here are some key features of volatile stocks:
- Rapid price movements: Most volatile stocks see drastic price changes in real time, within a day or a few days.
- Volume and liquidity: Volatile stocks generally have high trading volumes and liquidity, enabling traders to enter and exit positions quickly.
- Risk and reward: Volatile stocks involve higher risk, which is accompanied by higher rewards. Investors in volatile stocks can either gain good returns or incur hefty losses.
- Market trend and sentiment: Volatile stocks are highly influenced by the current market trend (bullish or bearish) and market sentiment. Furthermore, affecting factors include news, earning reports, regulatory changes, etc.
- Indicators: Beta is one of the best measures to calculate a stock’s volatility against the overall market.
Interpreting beta
Numerous technical indicators are present when executing technical analysis for a specific stock. Beta is one indicator that provides information about how volatile a stock is compared to the overall stock market.
Here are the beta numbers and their meanings:
- Beta = 1: The stock is moving similarly to the market trend.
- Beta >1: The stock is more volatile than the overall market’s volatility.
- Beta <1: The stock is less volatile than the overall market’s volatility.
- Beta = 0: The stock’s price movement is unrelated to the market’s volatility.
- Negative beta: Although rare, this indicates that the stock has an inverse relationship with the market.
Read more: Share market down
How to find high-volatile stocks?
Most investors use beta as an ideal technical indicator to find volatile stocks in the stock market. When using beta, you can identify and analyse stocks with high volatility if their beta score exceeds 1.
Apart from beta, you can also use another technical indicator called standard deviation. Standard deviation is used to calculate the amount of variation or dispersion in a stock’s returns over a specific period. It shows how much the returns deviate from the average return (average mean price). The higher the standard deviation, the higher the stock’s volatility.
Another way to easily find high-volatile stocks is to track the Nifty High Beta 50, which invests in stocks with a beta score of more than 1. You can find the stock names, analyse them based on your research, and invest accordingly.
You can also check the daily volatility report published for the F&O segment to understand if the volatility is based on the underlying stock’s volatility. This way, you can find volatile stocks and invest for the price functions.
Read more: Large-cap stocks
Factors to keep in mind while investing in volatile stocks
Here are the factors you should keep in mind while investing in volatile stocks:
- Risk tolerance: Determine how much risk you can take and how much you are comfortable losing without a financial burden if volatility results in losses. Analyse stocks based on their risk exposure to understand how much volatility they should have.
- Investment horizon: Depending on your strategy, volatile stocks might be more suitable for short-term trading than long-term holding. Hence, if you want to invest for the short term to realise quick gains, you can consider investing in volatile stocks.
- Research and analysis: Most volatile stocks come with higher risk than other types of stocks. Hence, analyse the company’s financial health, including its revenue, earnings, debt levels, and growth prospects. Furthermore, understand the current market trend and execute sector-wise analysis to ensure you are investing at the right time.
- Diversification: It is never wise to put all your money in the single most volatile stock. If your strategy is to invest in volatile stocks for quick gains, ensure that you invest in multiple volatile stocks to spread the risk and limit your losses. Furthermore, balance your portfolio with a mix of high-risk volatile stocks and more stable investments.
Read more: Small-cap stocks
Conclusion
Volatility in the stock market is inevitable as stocks fluctuate in price in real time. However, volatility can provide investors with good returns if they extensively analyse high-volatile stocks based on fundamental and technical factors. If you are looking to make profits in the short term, you can utilise the beta, which is the primary indicator of volatility. However, as volatile stocks are risky, ensure that you invest in volatile stocks that align with your risk appetite and investment goals.
Now that you know what volatile stocks are, you can analyse them better and make informed investment decisions.
