What Is a Stock Portfolio and How Do I Start One?
An investment portfolio can include a wide range of investments, including stocks, bonds, real estate, commodities, art, classic cars, rare books, farmland, and so on. Anything one has bought with the idea that it can appreciate in value is an investment.
For our purposes here, we are looking at the construct of a stock portfolio. If you own one stock, you own one stock, but if you own two or more stocks, you have a stock portfolio.
The standard investment advice is to have a diversified portfolio. Why? Because diversification reduces the risk of loss, which is higher when an individual concentrates their stock portfolio holdings on a single industry or sector.
For example, if you have a portfolio that consists of only airline stocks and jet fuel costs increase substantially, every stock in that portfolio is apt to be adversely impacted since fuel costs are the second biggest expense for airlines behind labor costs. However, if you own just one airline stock in your portfolio along with a restaurant stock, a technology stock, a bank stock, a real estate stock, and a casino stock, the risk of loss is reduced since none of those stocks would be directly impacted by rising jet fuel costs.
That is the benefit of diversification with a stock portfolio.
An investor has better protection against outsized losses with a diversified stock portfolio. That would be one that holds many different types of stocks from different sectors. There are 11 S&P 500 sectors: communication services, consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, real estate, and utilities.
There are 505 stock listing in the S&P 500 (some companies have two different classes of stock), yet there are literally thousands of publicly traded stocks in which to invest. That includes micro-cap stocks (market capitalization between $50 million and $300 million), small-cap stocks (market capitalization between $300 million and $2 billion), mid-cap stocks (market capitalization between $2 billion and $10 billion), large-cap stocks (market capitalization between $10 billion and $200 billion), and mega-cap stocks (market capitalization generally above $200 billion).
Generally, smaller-sized stocks are more volatile than larger-sized stocks, because the pool of trading liquidity isn’t as deep. That doesn’t mean, however, that there aren’t good investment opportunities among smaller-sized companies. In fact, all of today’s larger-sized companies began as smaller-sized companies.
The stocks one chooses to invest in will depend a lot on an individual’s risk tolerance and investment goals. Those are not the same for every investor, but what you know about yourself will play a role in your selection of stocks for a stock portfolio.
You might be conservative on the risk spectrum, so you would likely be looking at stocks with low volatility, dependable earnings growth, and which pay a dividend. If you are on the aggressive side of the risk spectrum, you might be more interested in stocks with high growth potential. They most likely won’t pay a dividend, but they will also be stocks that hold stronger return potential if the companies live up to and/or exceed growth expectations.
To get started with a stock portfolio, then, one must take their own risk assessment and research stocks that fit that risk assessment. Briefing.com can help in that process. Our Emerging Growth Stocks page and our Stock Ideas page, which includes value and income stocks, are updated weekly with investment ideas. Additionally, we write several Story Stocks each day that delve into a wide range of companies across all sectors, and we also have a column, The Next Big Thing, that focuses on initial public offerings (IPOs).
Next, determine how much money you have to invest, and how that money is going to be allocated to each stock in a stock portfolio. For example, if you have $10,000, and want to buy stock in 10 different companies, you could either allocate that money equally ($1,000 for each stock) or invest more in some stocks versus others because you like their prospects more. Perhaps you allocate $3,000 to one stock and $7,000 for the other nine stocks. Again, this decision will boil down to your risk tolerance and your conviction in a particular stock idea.
The simplest way to buy stock is to use an online brokerage service. Once you have opened an account, you will have the ability to buy (and sell) stock on your own or with the help of a registered agent. These services will also help you keep track of how your stock portfolio is doing relative to your initial investment (known as your cost basis) and will provide research tools to help you identify new ideas for what is hopefully a growing, diversified, and profitable stock portfolio.
