For those new to the stock exchange, your stock portfolio is essentially the summation of all your stock investments. In addition to stocks, your portfolio may include other traded security investments in cash and bonds as well. The goal of building an investment portfolio is driven by the need to generate, stabilize and then increase income from investments.
Therefore, building a good stock portfolio should be considered the most important requirement for earning profits from the stock exchange. As to how you should go about it, we have some expert tips for you to go through next.
Build Strategic Diversity in Your Stock Portfolio
Diversity in a stock portfolio is one of its strongest elements that stabilize the investor’s income. Although it can get quite complicated in application, the underlying principle is simple enough. Your stock investments should be strategically spread out between multiple sectors in such a way that:
- You continue to earn a profit from one or more sectors, even when your investments in other sectors are not doing well.
- Your benefits from the rise of one sector exceed your losses in an opposing segment of the industry.
Strategize Carefully with Penny Stocks in Your Portfolio
Small company shares that trade at $5 or less are often called penny stocks. Traditionally, the value was set at $1 or less, but the SEC increased the value to $5 later to account for inflation since its inception. Now, penny stocks are highly volatile investments by nature, which means that there is always a chance that you will either suffer a big loss or a huge profit by investing in them. However, if you know how to balance out the volatility by strategically investing in a diverse range of penny stocks, the chances of earning a significant profit from the portfolio can be greatly increased.
Invest in Companies and Not Just Sectors
Now that we have gone through the basics of creating a diverse portfolio with diverse investments in multiple sectors, it is time to look at a more specific aspect of building successful stock portfolios. While it is easier to speak in terms of sector, it is a very broad definition. We do not buy shares from industrial segments; we buy them from individual companies. Therefore, the success of your stock portfolio is highly reliant on which specific companies you decide to invest in any sector.
For example, Microsoft and Apple are both tech giants who compete against each other in multiple technological segments of the industry. Therefore, a hugely successful year for Apple may mean a bad year for Microsoft, although they are both stalwarts of the tech sector. Hypothetically, investors who did the research on multiple companies and estimated Apple’s triumphant year in advance would profit the most, because they backed their estimates by concentrating most of their tech investments in Apple.
On the other hand, investors who simply scattered their tech investment budget across Apple, Microsoft, and several other companies without any special focus on one or more companies, would only find their returns to be average. They will miss out on the opportunity to earn a sizable profit from their tech stock portfolio, simply because they failed to understand the importance of researching into companies also, rather than just broad sectors.
The stock exchange can feel overwhelming at times, considering all that there is to learn first and manage later. This learning curve can be exceptionally steep for newcomers, but if you take some time to understand the core concepts that drive the stock market, the rest of it will fall in line pretty quickly.