High volatility stocks can be a blessing and a curse. Who likes high volatility stocks? Traders who look to exploit swings in the markets whether up or down for profits. While investors who want steady moves higher in their portfolios hate the high volatility stock for the most part. In the following article, TRADEPRO will discuss what high volatility stocks are, how to find them, and how they can be beneficial to your trading.
First, what is a high volatility stock? It is a stock that has substantial price changes in a given period. Stocks that move in any direction fruitfully can be deemed as high volatility stocks. Whether they move within a 5% range, continuously move up or down, they can be considered high volatility stocks. Why would you want to trade high volatility stocks? Well, higher risk should be compensated with higher returns. So investing or trading higher volatility would mean more gains for investors or traders and they have the possibility of paying dividends.
High Volatility Stocks- Identification
A trader can also compare a stock’s movement to its respective benchmark. This is where a stocks beta comes into consideration. Beta can be defined as the risk exposure of stock to general movements, compared to a stocks benchmark. The benchmark or index has a beta of 1.0. High volatility stocks have betas of 1.0+, the higher the beta the more volatile the stock’s movement. For example, if the S&P 500 moves 10% in either direction, a 1.0 beta stock would move 10% as well, however, a 2.0 beta stock (high volatility) would move 20% in either direction. The same would go for negative beta stocks, if a stock has a beta less than -1.0, such as -1.7 it can be considered a high volatility stock that moves inverse to its benchmark. A note of warning is that beta is based on a certain time frame of a stock’s movement. Meaning a stock may have a different beta if a month-long time frame is used vs a year-long time frame.
Take a look at the example below of the same stock, with different betas due to different time horizons.
Beta
We’ve taken AMD, the tech giant as an example. The chart below is taken from Zacks.com which graphs stocks beta based on a 5-year time period. You can see that the beta changes. That is due to internal company conditions and economic conditions. In 2017, AMD had a beta of 2.6 and currently, the beta is 3.40. AMD has a beta well above 1.0, which is compared to the S&P 500 benchmark. Making it a high volatility stock.
Technology
There are further ways to identify high volatility stocks, it does not begin and end with beta. However, beta is a big proponent of it. Another way to identify a high volatility stock is by looking for tech stocks. Simple as that, it’s common that tech stocks have higher betas. That is because there is higher uncertainty in tech more so in the smaller less established companies. There are also apart of a fast-paced industry that is ever evolving. The speed at which innovation develops in the tech industry is unrivaled and there is a lot of competition between companies. Uncertainty, therefore, increases risk increases and the beta increases. Even so for more established companies. Such as Amazon, who at one point had a beta lower than 1.0, now has a beta of 1.6. Amazon is an established company however in the tech industry uncertainty is prevalent.
Fundamental Analysis
There is one more way one can identify high volatility stocks, which is through uncertain internal company management. If a company is uneasy on a fundamental level or on an earnings level. Meaning if profits are inconsistent or management is volatile, you can expect that uncertainty to be reflected in the stock. An example would be Dillards, a department store that you would not expect to have a high beta, but has just recently crossed under the 1.0 beta level from a near 3.0 beta just over 6 years ago. This is due to poor management which has recently been strengthened. Other fundamental
High Volatility Stocks-Some of The Top Stocks
There are many high volatility stocks out there, however, it’s important that you find more established volatile stocks, to ensure liquidity among other things. The two mentioned before are AMD and Amazon (AMZN), another that we can consider is Devon Energy (DVN).
The criteria we used in choosing three stocks was simple. First, they must be high volatility, and in that have high betas. The next should be well established and have had traded on an exchange for a while. In that, we were looking for larger market caps and finally, the stock should have profitable earnings results and high expectations for the future.
Amazon (AMZN)
Beta: 1.63
Market Cap: $928.66 Billion (April 22nd, 2019)
Last four earnings reports: $3.27, $5.07, $5.75, $6.04
Potential for growth: Amazon has been a leader in the E-commerce industry for a while now and has been growing lockstep with the S&P 500. Amazon hit a $1 trillion market cap this past September and looks like it is moving back into that level as the S&P 500 nears all-time highs yet again. The company’s earnings have been growing as well along with the stock price and have been reaching different business outlets. Such as for streaming services, along with selling literally anything you can imagine. The future is bright for Amazon.
Advanced Micro Devices (AMD)
Beta: 3.40
Market Cap: $30.48 Billion (April 22nd, 2019)
Last four earnings reports: $0.08, $0.11, $0.09, $0.04
Potential for growth: AMD’s high beta is clearly seen in its stock price behavior, as the S&P 500 hit all-time highs in September so did AMD, however to a more vertical leap. The progression of AMD in terms of innovation, video cards and all is almost unrivaled. Earnings have been steady positive and the stock has reacted well to the recent upside in equities. The beta works as a double-edged sword as the stock fell over 50% of the dump late in 2018. That can be a good opportunity as we will see in the next section. As for the future, AMD’s innovation has proven to surpass competitors and they are continuously improving, if we can see an increase in earnings quarter over quarter, the future will look bright.
Devon Energy (DVN)
Beta: 2.25
Market Cap: $15.41 Billion (April 22nd, 2019)
Last four earnings reports: $-0.38, $-0.83, $5.14, $2.48
Potential for growth: Devon Energy is a Fortune 500 company, ranked mid-tier which is impressive on its own. Their stock price has been on a strong bull run since the dip and earnings have shown significant gains and shifts since the turn of the year. From negative earnings to well into the positives. The company also has plans to expands its resources to Canadian oil sands and progress with growth, there is a lot of potential in Devon and good returns to be made.
High Volatility Stocks-Investing & Trading
High volatility stocks are for all, traders and investors alike. It may not seem so but when the market is rallying, and the bull is strong, rebalancing a portfolio to a more aggressive standpoint will help in the long run. High volatility stocks will return much more in a bull market than your average index fund. High volatility stocks can also add to the diversification of a portfolio, which contributes to the satisfaction of portfolio managers goals. There are high volatility stocks that also pay dividends, should there be more wild swings in the stocks price, the quarterly dividend received for holding the stock in your portfolio can cover some of the damage.
In the world of trading, high volatility stocks are a trader’s best friend. Money can be made on the upside and downside. Since their high volatility stocks, it’ll be rare that they do not move at all. Presenting traders with a lot of opportunities. Want to optimize your returns, using options to trade the already high volatility stocks can amplify returns with a limited risk taken. The options course is available in all TRADEPRO packages.
High volatility stocks should not be shunned or ran away from, they are multi-use assets that can contribute to anyone’s goals, whether it is investing or trading!
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.
