Investment Portfolio Definition
The formation of an investment portfolio is an important task for every investor and a decisive condition for future success in the background market - especially when it comes to the brokers with low minimum deposit like an Exness broker.
An investment portfolio is a set of financial instruments owned by an investor, aimed at preserving and increasing funds. Such a set may consist of stocks, bonds, mutual funds, and other instruments. They differ not only in basic characteristics but also in the level of risk and profitability. As a general rule, the higher the risk, the higher the potential return. For example, investments in shares of young companies are most at risk. Government bonds are the least risky.
A Diversified Portfolio Is Vital To Any Investor's Success
By making transactions in the stock market, you can both earn income and incur financial losses. To minimize risks, we advise you to adhere to the following rules when compiling a portfolio:
- Compliance of assets with the purposes of investment. Before you start trading on the stock exchange, clearly formulate your financial goal. For example, if your main goal is to maintain and increase your investment with minimal risk, then a conservative strategy will suit you. It is most suitable for novice investors.
- Portfolio diversification. Your capital should be distributed among different assets. Even if one of them causes a loss, the growth of others will be able to compensate for these losses. Let's look at an example of how diversification works. Let's say you bought shares in Nestle, Apple, and Coca-Cola. All these companies belong to different sectors of the economy. At the same time, such a portfolio may not always be reliable. The fact is that these companies belong to the Russian economy and depend on it. In the event of a crisis in our country, these papers can "sag" along with the expected income. Therefore, add securities of issuers from different countries and sectors of the economy to the portfolio, and also pay attention to the fact that companies do not depend on one indicator (in our example, this indicator is the Russian economy).
- Instrument liquidity. Liquidity is understood as the ability to quickly and profitably sell assets on the stock market. For novice investors, we recommend buying instruments with high liquidity. You can always sell them on the stock exchange at the market price.
Key Points And Investment Principles
We have already covered the key points that you should pay attention to when compiling a portfolio, but this is not enough. In order to consciously choose investment instruments and achieve the desired results, it is important to know a few more rules:
- Don't spend all your money buying stocks. For novice investors, this approach can be very risky, since the value of shares is highly dependent on changes in the economy and can change dramatically.
- Don't trust everything they say. Shares that are talked about everywhere and everywhere can be too overvalued, that is, they can be sold much higher than their real value. We advise you to independently study the financial performance of the company: the dynamics of revenue and net profit, the number of funds in the company's account, the presence of debts, and growth factors.
- You shouldn't speculate. The speculation involves generating income by changing the value of an asset in the short term. For example, you bought a stock for 10 rubles and expect that in a couple of days its price will rise to 12 rubles. However, in practice, the security can "sag" a lot, and then you will have to close the deal with a loss or wait an indefinite amount of time until it recovers and possible growth. Speculation requires a lot of effort, time, and special knowledge and is suitable for more experienced investors.
- Read analysts and trusted sources of information, follow the news. You can trust the opinion of experienced investors, and find relevant ideas and selections of promising securities on the broker's website. So, based on forecasts and various reviews, you can decide to invest in a particular asset. However, it is important to remember that only you are responsible for your decision and no one can guarantee you a 100% future result.
- Determine your risk profile before you start trading. This is necessary to understand which investment instruments are right for you. The risk profile can be, for example, conservative, rational, or aggressive. You can go through risk profiling with a broker.
The Essence Of Appropriate Asset Allocation - Asset Allocation Strategy
Diversification is the key strategy for asset allocation. Consider an investment portfolio that includes two stocks and two bonds. If your goal was to have a portfolio of 50% stocks and 50% bonds, then technically you have the right asset allocation. However, since you only have 2 stocks and 2 bonds, your portfolio will not be diversified.
Conservative vs. Aggressive Investors Styles
A conservative strategy is the least risky as opposed to a balanced and aggressive one. It provides the best protection for the trader's funds, protection against the risk of losing all capital. However, it also provides the smallest, but more stable profitability.
The aggressive trading style is more serious, it is aimed at getting the maximum income from various stock investments. Such a strategy will be good for those traders who want to significantly increase their capital in a short time and are ready to take certain risks, sometimes very high ones, for this. All funds that a trader has invested in the shares of those issuers are the most liquid.
Your Investing Portfolio Rebalancing
In life, most often, each trader only adheres to a certain style of trading, changing it to suit his needs, or completely changing it completely depending on the situation. You must be clearly aware that it makes sense to follow a certain aggressive or conservative strategy only when the market situation turns in a direction favorable for the chosen option.
What style of trading to choose when working on the currency or stock market?
There are currently three fundamental styles: aggressive, balanced, and conservative. Each of them has its own characteristics, positive and negative sides, pluses, and minuses. Styles can be called strategies, but like everything related to the field of exchange trading, they cannot be considered final and strictly follow them.