High Volatile Stocks
Volatile stocks are highly popular among traders as they offer lucrative trading opportunities. Volatility is the dispersion of returns for a stock or security over a period of time. It is calculated as the average difference between the daily high and low of the stock, divided by the price of the stock. For experienced investors, volatile stocks could also mean stocks with highest daily trade volume. In addition to this, open interest, volume, put-call ratio, implied volatility, etc., are also used to identify the volatile nature of a stock. Traders buy volatile stocks because they witness significant price movements in the short term. Generally stocks of mid and small cap companies, with market capitalisation of less than Rs 25,000 crore qualifies as volatile stocks.
Volatile stocks can be classified into 2 types:
- Currently volatile stocks - Stocks that are experiencing high price swings
- Expected to be volatile stocks - Stocks that are stable now, but are expected to show greater volatility in the near term.
Identification of Volatile Stocks
Investors and traders often use Beta to identify volatile stocks. The beta index measures a stock’s volatility compared to the overall market. Considering the beta value, stocks can be broadly classified into 3 types.
- If the beta is 1, it means the stock is relatively safe since the market fluctuation is in proportion to the changes reflected in the stock price
- If the beta value is less than 1, then the stock is less volatile than the overall index or market
- If the beta value is more than 1, it indicates wide fluctuations in the stock price compared to overall market.
Volatile stocks are associated with beta values above 1. Any minor changes occurring in the stock market impact these stocks as it creates uncertainty regarding the company’s future and performance. This uncertainty causes volatility and opens up lucrative investment and trading opportunities.
Merits of Highly Volatile Stocks
There are several benefits to investing in highly volatile stocks such as:
- Attractively high returns
- Comparatively low cost
- Suitable for all investment goals
- Reduced market demand
- A decrease in the market value
Demerits of High Volatile Stocks
Irrespective of these benefits, there are a few demerits to investing in volatile stocks. Some of them are:
- Dividend pay-outs are not available
- Risk is high
- Sectoral downtrends
- Value traps
Volatile stocks are best suited for individuals who are ready to take high risks and are interested in identifying high potential stocks. Since stock market fluctuations impact stocks to a greater extent, interested investors should be well-versed with it and keep a long-term investment horizon.