Stockbrokers are sometimes on the lookout for volatile stocks. The reason why they do this is that these stocks that are witnessing significant price movements tend to give the best returns. Often, volatility can happen in a matter of minutes. The pattern varies, at times some shares are volatile during intra-day trades, while some become temperamental when there is a high volume of trade in them.
But before finding a stock, we should understand the fundamental nature of volatile stocks.
What are volatile stocks?
Volatility could mean many things. There are different calculations, criteria, mathematical models and concepts used to measure volatility. Hence, volatile stocks mean different things to different day traders. For some, it could mean stocks with the most considerable difference between the high and low price of the day. In contrast, some experienced investors believe that volatile stocks could take on a completely different interpretation. To them, these stocks could mean the most active stocks with the highest volume. For some others, these stocks could be the ones screened based on mathematical models and complex calculations taking historical data into account.
Hence, volatile stocks are affected by stock market fluctuations. Generally, equity shares of small and mid-cap companies are classified as volatile stocks. They are subjected to both systematic and unsystematic risks of the stock market.
High volatility stocks are quite popular and sought-after in the investment circle due to their high-risk, high return ratio.
How do you identify a volatile stock?
You could identify with a volatile stock by beta index. This index takes into account the impact created by stock market fluctuations on a specific share price and compares the same with changes in the benchmark index. Shares with a beta value of 1 are considered to be a relatively safe investment venture, as the market fluctuation is proportional to changes reflected by big companies. A beta value of less than 1 means relatively stable security. While beta higher than 1 indicates extensive fluctuations in tandem with market changes. Hence, it’s considered to be a risky investment tool.
Hence, volatile stocks are related to a beta value higher than 1. Minor changes in stock market indicators readily impact it. Any sign of change creates uncertainty regarding the performance of a company in the current economic condition. And hence, this creates a greater demand for purchase or sale of these assets in the market. Naturally, the trade such shares tend to become more volatile.
Volatility is recognised on these criteria-highly active by share volume, highly advanced, highly declined. Also, there are parameters such as open interest, put-call ratio, and implied volatility used to assess the volatility in the underlying stock.
Advantages of high volatile stocks
Investing in high volatile stocks come with several benefits.
– High returns
– Lower costs
– Lower demand in the market
– Fall in the market value
– Suits all investment goals
Challenges of high volatile stocks
Despite several benefits, highly volatile stocks come with particular challenges:
1)High risk
2)Value Trap
3)Sectoral downtrends
4)No dividend payouts
Conclusion
Individuals with a high-risk appetite and an eye to identifying the high potential stocks can invest in volatile stocks. Thus, investors should know how to read any stock market fluctuation, as it impacts the stocks to a great extent. It’s also essential to have a long-term vision. Shares of companies with a stable foundation are a good bet for investors who would take into account all short-term risks and keep their portfolio locked in for a long period. In such a case, returns generated would be manifold. However, it’s essential to do proper due diligence and analysis of the company to mitigate all the unnecessary risks involved. For any guidance on how to find volatile stocks, you could always approach Angel One!
