Introduction
The average return of the stock market in the past 5 years is more than 15% which offers growth in a compounding rate. The fun fact is that learning about the stock market is not as complicated as it seems and one can easily build a profitable portfolio through different shares. Now the question arises “How to build a portfolio of stocks?” This article will serve as a guide to creating an effective portfolio in accordance with your goals. If you are a beginner this post will definitely answer your maximum questions.
Click here to understand the basics of stock market.
Understanding Stock Portfolios
A stock portfolio is a collection of different shares from different industries offering the benefits of diversification. A well-diversified stock is beneficial in protecting the invested capital of an individual while earning desirable returns and mitigating possible risks. The collection of different shares of companies from different market capitalizations increases the chances of earning over 50% of returns from the stock market.
Assessing Your Financial Situation
Before making a portfolio you should calculate the amount that you can invest on a monthly basis while satisfying your personal needs. This can be done through the preparation of a budget to monitor your expenses and savings to determine the amount of money you can invest on a regular basis. However, before investing you should keep emergency funds in the form of fixed deposits or liquid amounts with the bank to meet troublesome situations.
Understand the impact of interest rate and inflation on your investments by clicking the respective links.
Setting Investment Goals
The goal of investment in stocks is not a random thought, rather it is driven by your goals which may be short-term or long-term. Investing in the short-term usually focuses on the time period of 1 to 3 years and higher than that is characterized as long-term. Therefore, prior to developing a stock portfolio, you should be clear with your investment goals to ensure a systematic and planned approach. Your goals may be specific, measurable, relevant or time-bound.
Understand Risk Tolerance
If you are in your 20s then you are lucky to read this because your risk tolerance is very high compared to other investors. Risk tolerance refers to the ability and willingness of an investor to lose all of its invested capital in exchange for enduring returns. You can use a risk tolerance questionnaire to identify the level of comfort at which you feel safe to invest. This will help to diversify your investment at large-cap, mid-cap and small-cap companies.
Research and Investments Diversification
Understanding the fundamentals of shares is a necessary step to conduct before investing in companies. Key metrics to measure the performance of a stock include its debt levels, current ratio, ROE ratio, Cash Flow, PEG ratio and dividend yield. You should keep learning and gathering knowledge of the market which will gradually strengthen your portfolio. Diversification is the core area of the portfolio, therefore it is necessary to spread investment across different industries while avoiding overdependence on a particular sector.
Choosing the right stocks
Based on your preferences you can choose from different stocks such as value stocks, growth stocks, blue-chip stocks, dividend stocks or even penny stocks. For example, you are planning to invest in 10 stocks for now. You should diversify your portfolio by investing in 3 blue-chip shares, 2 growth shares, 2 value shares, 2 dividend shares and 1 penny share (Note: This is just an example).
Monitoring and Rebalancing Portfolio
Regular monitoring is a crucial step to recognize your top-performing and low-performing stocks. This is also beneficial in knowing when to buy or sell stocks to generate effective returns out of your portfolio. This also supports portfolio rebalancing which means adjusting the weighing of your portfolio by buying or selling stocks. This is beneficial in achieving the desired risk-return profile through a portfolio while booking profit from a few stocks.
