Understanding Stock Portfolios for Beginners
O ne of the first steps in investing is to open a stock portfolio. But, before you can start adding to your portfolio, you should first have a clear understanding of what a portfolio is, what types of stocks typically make up a portfolio, and the different types of portfolios you can build. Explore these factors and the steps you can take to build a solid stock portfolio for successful investing.
What Is a Stock Portfolio?
A stock portfolio is a compilation of stocks you invest in with the intention of making a profit. Portfolios typically aim to establish long-term financial growth instead of short-term gains. You can build and manage your stock portfolio on your own, or you can use a financial advisor, money manager, or another financial expert to manage and build your portfolio.
One factor that greatly contributes to the success of your stock portfolio is diversification. Diversification refers to reducing the risk of your portfolio by allocating investments in several different stocks. Choosing stocks in different industries and categories is a good way to add diversification to your portfolio and reduce the risk associated with investing in too many of a similar type of stock. Many people also invest in various other financial instruments, such as bonds, commodities, cash, exchange-traded funds, and close-ended funds.
Types of Stock in a Portfolio
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There are a number of different types of stocks you can invest in. Each stock category is based on return on investment, risk, and volatility of the stock. You should choose stocks that best suit your own personal investment style. For example, if you are a more reserved investor, you could opt for stocks with a lower risk associated with them.
The following are the most common types of stocks to consider including in your portfolio:
Income stocks are securities that offer regular dividend payouts that typically increase over time. This type of stock frequently delivers a high yield that can generate much of the stock’s overall returns. Most income stocks feature low levels of volatility when compared to the overall stock market and provide higher dividend yields than the market average.
Common industries where you’ll find income stocks include the energy sector, real estate, financial institutions, and natural resources.
A growth stock is when you invest in a company that shows great potential for growth in the near future. Many companies that offer growth stocks are newer organizations, such as startups, that stand to make a large impact on their market. A growth stock is generally riskier than income stocks, as the investor stands to lose money if the company doesn’t end up flourishing as expected.
Growth stocks can be found in any industry, but some of the most prevalent growth stocks are in the technology, biotechnology, and alternative energy markets.
Value stocks are those that are traded at prices lower than what it seems they should be as determined by a company’s financial status and the technical trading signs surrounding the stock. These stocks are purchased with the belief that the value of the company will go back up in the future, allowing investors to make a profit when the stock prices rise. Value stocks are usually offered from more established companies and therefore aren’t typically as risky as growth stocks.
Speculative stocks are those offered by newer companies with an unclear future. For example, a new startup could be considered a speculative stock because the success of the company is still up in the air. Common types of speculative stocks include penny stocks, pharmaceutical stocks, emerging market stocks, and rare materials stocks.
Cyclical stocks are stocks that track the worth of the stock market as a whole. When the stock market is performing well, cyclical stocks will also perform well. The same is true for the opposite. Common companies that offer cyclical stocks include banks, airlines, and construction businesses.
Types of Stock Portfolios
There are a few different types of stock portfolios you can build. These portfolio categories are based on the investment strategy they support and the risk tolerance needed to build each type of portfolio. The most common types of stock portfolios you should be familiar with include:
Income Stock Portfolio
An income portfolio is aimed at making profits from stocks that pay dividends. Stocks in this type of portfolio are chosen specifically for their high-yield potential in order to generate regular and increasing cash flow. Income portfolios are typically considered lower risk than most other portfolio varieties.
Growth Stock Portfolio
A growth portfolio is created with the expectation of fast growth compared to the rest of the stock market. This type of portfolio is often risker than other types of stock portfolios, as investors have to purchase stocks based on speculation rather than on how the company is performing currently.
Conservative Stock Portfolio
A conservative portfolio carries very low risk but can take time to begin to generate income. Investors with conservative portfolios make low-risk stock investments that offer long-term growth potential.
How to Build a Solid Portfolio
When building a stock portfolio, it’s important to take time to evaluate your goals and have a clear investment objective in mind. Here are the steps you can take to best prepare when it comes to building and growing your investment portfolio:
1. Determine Your Investment Timeline and Goals
The first thing you should do before opening a portfolio is to determine your goals and timeline for your investments. One thing to consider is what your overall goals are for investing. Do you want to make short-term cash to have a down payment for a home? Or, do you want to invest so you can save for retirement? Everyone’s investment goals are different, and getting as clear as possible about yours will help you determine which portfolio type and stocks are right for you.
2. Get Familiar With Your Risk Tolerance
Another factor to consider when starting a stock portfolio is how much risk you can handle. While some people get a thrill from risking a lot on an investment, others aren’t comfortable with putting their hard-earned money on the line for risky investments. Risk-tolerant investors will choose very different stocks to include in their portfolio than more risk-averse investors.
Another factor that contributes to your overall risk level is your timeline. If you are investing in the short term, you’ll have less room for loss compared to when you’re investing for the long term. This is because long-term investments provide an opportunity to recoup any losses incurred along the way.
3. Decide if You’ll Manage Your Own Portfolio or Use a Broker
If you are starting your portfolio with a smaller amount of money, you can likely effectively build and manage a stock portfolio on your own. If, on the other hand, you want to invest a large sum of money, you may want to consider hiring a broker firm, money manager, or another financial expert who can manage your portfolio. If you don’t want to be an active investor, having someone else manage your portfolio is a good option.
4. Get Familiar With Stock Market Terms
There are a lot of stock market terms and general trade lingo that you should take time to familiarize yourself with. While knowing everything about trading stocks isn’t necessary to have a successful portfolio, it can help you understand what’s going on with your portfolio and enable you to make more informed decisions when investing.
A few basic stock market terms to brush up on include:
- Bull market.
- Bear market.
- Initial public offering.
- Moving average.
Taking time to fully understand the various aspects that go into a stock portfolio as well as your own financial goals and timeline will ensure your investment portfolio is profitable.