Investing made easy: Understanding Stock market portfolio

Stocks are the most common component of an investment portfolio. They refer to a portion or share of a company. It means that the owner of the stocks is a part owner of the company. The size of the ownership stake depends on the number of shares he owns.

Stocks are a source of income because as a company makes profits, it shares a portion of the profits through dividends to its stockholders. Also, as shares are bought, they can also be sold at a higher price, depending on the performance of the company.

Types of Portfolios

Portfolios come in various types, according to their strategies for investment.

1. Growth portfolio

From the name itself, a growth portfolio’s aim is to promote growth by taking greater risks, including investing in growing industries. Portfolios focused on growth investments typically offer both higher potential rewards and concurrent higher potential risk. Growth investing often involves investments in younger companies that have more potential for growth as compared to larger, well-established firms.

2. Income portfolio

Generally speaking, an income portfolio is more focused on securing regular income from investments as opposed to focusing on potential capital gains. An example is buying stocks based on the stock’s dividends rather than on a history of share price appreciation.

3. Value portfolio

For value portfolios, an investor takes advantage of buying cheap assets by valuation. They are especially useful during difficult economic times when many businesses and investments struggle to survive and stay afloat. Investors, then, search for companies with profit potential but that are currently priced below what analysis deems their fair market value to be. In short, value investing focuses on finding bargains in the market.

Steps in Building an Investment Portfolio

To create a good investment portfolio, an investor or financial manager should take note of the following steps.

1. Determine the objective of the portfolio

Investors should answer the question of what the portfolio is for to get direction on what investments are to be taken.

2. Minimize investment turnover

Some investors like to be continually buying and then selling stocks within a very short period of time. They need to remember that this increases transaction costs. Also, some investments simply take time before they finally pay off.

3. Don’t spend too much on an asset

The higher the price for acquiring an asset, the higher the break-even point to meet. So, the lower the price of the asset, the higher the possible profits.

4. Never rely on a single investment

As the old adage goes, “Don’t put all your eggs in one basket.” The key to a successful portfolio is diversifying investments. When some investments are in decline, others may be on the rise. Holding a broad range of investments helps to lower the overall risk for an investor.

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