What Is a Stock Portfolio?


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Video Transcription:

Hello traders. Welcome to the stock trading course and the seventh module, ‘Building your Stock Portfolio’. In this lesson, we’re going to define what a stock portfolio is and what we’re looking for when we’re building a stock portfolio of our own.

Let’s start by defining what a stock portfolio is. A portfolio is nothing but a group of financial assets held by investors. In this case, we are talking about stock portfolio, so we are talking about a group of stocks held by investors. Stock portfolios are just a group of stocks that investors invested in, and are holding to see them grow. The idea of building a stock portfolio is to spread the risk of your investment. If you invest in just one company and the stock tanks, you can lose all of your initial investment, but if you invest in a stock portfolio, the risk is spread through different companies.

Basically, what the stock portfolio is doing for you is that, instead of putting all your eggs in one basket, you’re putting in separate baskets. Meaning that if one of the companies in your stock portfolio tanks, it really doesn’t affect your investment as a whole that much, because you still have other companies that you have invested in. If you only invest in one company and that company tanks, you’re going to lose your initial investment and be out the game for good.

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We’re going to learn here how to create a stock portfolio. Before that, we need to understand the different kinds of portfolio there is. The first one is the market portfolio, which is a bundle of investments that include every type of asset available in the markets. With each asset weighted in proportion to its total presence in the market. The expected return of a market portfolio is identical to the expected return of the market. Basically, what a market portfolio is…it could be defined as a market ETF but it’s not an ETF. It’s just a bundle of investments that simulate the market as a whole.

The second one is a zero investment portfolio, which is a group of investments which when combined create a zero net value. This type of portfolio can be created by simultaneously buying and selling equivalent securities. I know this sounds kind of weird having a zero investment portfolio, but you can use them for many things such as reducing taxes, reducing risks by protecting against unexpected shifts in the values of the securities, protecting the overall value of the portfolio so that investment can be made at a later date, etc. They have their uses but this is not the kind of portfolio we’re going to be focusing on.

The third one is income portfolio. This specific type of portfolio is designed for investors willing to have a steady income with very low risk. It focuses on stable companies that pay high dividends. When investors create an income portfolio, they choose to invest in income stocks, which are stocks of companies that pay high dividends, are very stable and which their stock value doesn’t move that much.

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Here at investoo.com, we focus on growth portfolios and this is the type of portfolio that you’re going to learn how to create. This type of portfolio focus on growth stocks, stocks that have a great chance of experiencing big increase in value. The risk is higher with the strategy but also the possible returns on your investments. Growth stocks are not the same as speculative stocks and this is a very important point that we have to make out.

Speculative stocks are those of young companies whose future is unknown, which makes them extremely high risk. Also speculative stocks are penny stocks, which are no good for investment purposes because they’re highly speculative and highly volatile and they have a high risk of bankruptcy. Growth stocks are those from some companies that undervalued at the current price and those that look healthier than previous quarters after analyzing its fundamentals.

We’re going to focus on companies that are undervalued at the current price. Why? Because they’re going to tend to move to their fair value and that is where we’re going to make our portfolio grow. Growth stocks can be companies that went on a high patch but they’re now stabilizing for a continuation of their historical performance, or companies that are starting to break out. Companies that invest in the creation of new products, which will mean a rise in sales, a rise in cash-flow, a rise in revenue and EPS.

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