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 High Risk Equities

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painofhell

painofhell

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PostSubject: High Risk Equities   High Risk Equities Icon_minitimeFri Feb 20, 2015 10:55 am

High Risk Equities are equities with a very high beta value. Beta is a value which indicates how much a stock’s volatility differs from the stock market. The stock market always has a beta of 1.0, so individual shares are measured against that benchmark. A stock or share that is more volatile than the market will have a beta higher than 1.0. Conversely a stock which is less volatile than the market has a beta that is less than 1.0. The higher the beta the riskier the stock, however the stock with a high beta will have the potential for high returns and the stock with a low beta has the propensity for lower returns.

For example Google has a beta of 1.15 and in one year it has gone from $568 per share to $923 per share and is a volatile technology stock. Facebook has a beta of 0.88 and though it is in the technology sector is not volatile and less risky than Google. Chevron which is in the energy sector has a beta of 1.16, so it has high volatility and more risky than Google for example. Barnes and Noble have a beta of 0.1, which is very low and indicates that it is a steady stock with hardly any risk factor. However, its growth rate is negative and when it is compared to another publisher in its sector, Amazon, which has a beta 0f 0.64 (still less volatile than the market) and a steady growth rate, an investor would probably choose Amazon, even though it’s a more risky stock.

The percentage of risk in equities is governed by two factors. They are the Micro and the Macro factors. The Micro factors are at the individual investment and savings level. For instance, if the general public of a country have a high level of investment or a high savings culture, the percentage of risk in investing in such a country is at low levels. Whereas low levels of investment or savings means that investing in such a country is high risk. Macro factors are factors like currency fluctuation, inflation, political instability, war, natural disasters, unrest and much more. Investing in such a country with one or more of these factors present is definitely high risk. It should be deeply analyzed and considered before making a final investment decision. For example, investing in the high risk equities of the stock markets of the Eurozone countries commonly known as the PIIGS, (Portugal, Italy, Ireland, Greece and Spain) is extremely high risk as their economies are debt ridden and the countries virtually bankrupt.

Investing in high risk stocks can be rewarding for the short term investor or the day trader in stocks because the investor can rely on technical analysis rather than fundamental analysis to determine short term price action. However, it is not recommended for the long term investor as high volatility and risk can erode profits and have a negative impact on the investment.

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