Beta Value Helps You To Invest And Manage Your Portfolio
You can hedge your stock portfolio by using the index futures. Learn more about it. This is because the risks are of two kinds which are systematic and unsystematic risks. When you have a portfolio that is diversified you minimize the unsystematic risks. You have to, however, deal with the systematic risks. These stock risks come with the macroeconomic factors and thus you can hedge it by using the index which is a representation of the market.
When you hedge a single stock if the price increases or decreases the position will neither let you make or lose money? This means that the position is totally indifferent to what the market is doing. This position thus becomes neutral to the conditions of the market.
To hedge a single stock position you should have an equal number of shares in the spot account as the lot size of the futures account.
Hedging is important because it helps to insulate your position taken in the market from any adverse market movements. The loss that is offset in the spot market is hedged with the gains that you make in the futures market. The risks that you need to hedge are the systematic and unsystematic risks. The systematic risk is hedged and the unsystematic risk is diversified. The systematic risk is dependent on the movements in the market that happens because of economic factors. The risk is applicable to all the stocks. Theunsystematicrisks are specific to each company. This thus has to be diversified.
To hedge a position you will have to take a counter position in the market. The stocks that have a less than 1 beta are the low beta stocks and the stocks with more than 1 beta is the high beta stocks. Beta is nothing but the measure of volatility in the market.
The beta of the stock is a measure of the volatility of its returns in respect to the return offered by the overall market. It is used in the capital asset pricing model. The company that has a higher beta value is a risky company and it also offers better returns.
Some of the stocks are volatile naturally because of frequent peaks and valleys in revenues. Some stocks follow the market while some others do not.
The historical data is used to measure the beta value and predict the events in the future. It helps to guide how you can manage your current investments and invest in the future investments.