Portfolio investments are investments in the securities of two or more companies at the same time. The main goal of this investment method is to reduce the risk of capital loss through the use of stocks and bonds with different levels of income and risk. The peculiarity of this approach is that the shares are not bought to obtain a share of the board in any company and only to generate income or preserve capital.
What are
Portfolio investments include such capital investments that enable the investor to effectively use the funds at his disposal. In total, they represent a portfolio of stocks, bonds and bank receipts. In order to compile an investment portfolio, it is necessary to have an idea of where and how to purchase securities, with what methods they need to be evaluated and how to predict likely changes in their prices.
Profit from capital investments can be obtained from dividends issued by the company or from the increase in the cost of purchased securities. There are some features of the acquisition and sale of shares and bonds, ignorance of which may lead to the loss of part or all of the invested capital.
Portfolio investment is the purchase of up to 10% of the shares of the enterprise. If the number of shares purchased exceeds this percentage, then investments are considered direct. They are mainly engaged in professional traders, and investors only buy parts in an already prepared portfolio of securities. If an investor makes investments through mutual funds and various funds, then he does not need to have special knowledge regarding exchange trading (although it is desirable).
Investors who plan to engage in investment activities on their own need to have some idea of how this can be done and what knowledge and skills they will need to achieve success in this activity. A misconception about how the stock market works, or lack of knowledge of the basic techniques for working with securities can lead to the fact that portfolio investments instead of profit will bring only losses. The first thing an investor needs to do is get access to the stock exchange.
Where to begin
You can buy securities either from friends or on the stock exchange. Most investors do not have such friends from whom it would be possible to purchase shares, therefore they go to the stock market for purchases. Access to it is provided by large banks of the country. In order to start conducting direct and portfolio investments, the investor must conclude an appropriate agreement, deposit the initial amount for the deposit, download and install a special program on the computer (QUIK). After installing the program and authorization, the investor gets access to the stock market of Russian and some foreign companies. He may already buy and sell shares, but for success he needs some more knowledge.
What you need to know in order to properly compose a portfolio
In order for direct and portfolio investments to be a profitable investment, it is necessary to determine what will result in a return on investment. This can be both income in the form of annually accrued dividends, and income from the growth of shares. This issue must be resolved before the purchase of shares and bonds, since the choice of companies whose shares will need to be acquired depends on it.
Any investor, even one whose deposit with six or more zeros, knows that money is a limited resource. To get the maximum profit, you need to decide on the investment strategy. Spraying cash on the purchase of shares and bonds of too many companies will have no effect. Therefore, you must first determine the composition and amount of portfolio investment. Determine which securities will need to be purchased. What is the level of risk and return on these securities. And for this it is necessary to conduct an analysis. In their work on the stock exchange, traders and dealers apply three types of analysis: technical, fundamental and comprehensive economic analysis of enterprises whose shares they plan to buy.
Fundamental analysis
A fundamental analysis of portfolio investments is the study of news, bulletins, historical reports on the activities of enterprises whose shares are supposed to be bought. Data on the economy of the state as a whole are also being studied: statistical data, laws and legal acts. Mostly tax and investment laws. The duties of the trader also include the analysis of annually published reports and performance indicators of companies by various rating agencies.
Fundamental analysis is complicated in that you have to process a large amount of data, and decisions must be taken promptly. Moreover, the use of any analytical tools, computer programs, formulas is impossible due to the characteristics of the information received. It is especially difficult to carry out for portfolio investments, since you have to process more data.
Due to the complexity of the fundamental analysis and its low efficiency, traders practically do not use it in their activities, but study it, since in some cases it can come in handy. For example: the investment portfolio includes shares of a company manufacturing mobile phones in country N. And here the investor learns from the news that a coup has taken place in country N and the enterprises are planned to be nationalized. If the investor is not in a hurry to take any actions to save the invested money, he risks losing all investments in these securities.
Technical analysis
Technical analysis is a system for collecting and processing visual information about changes in the price of a particular security that have occurred for a long time before that. It is believed that all factors are already taken into account in the price chart, plus history is often repeated. Ups are always followed by falls, market movements are predictable and you can safely make forecasts.
As experience shows, the price does not always reflect the real state of affairs, so you should not rely solely on technical analysis, given that factors such as the purchase of company shares by the owners of the same company can influence the price increase. As a result, an illusion is created that the company is operating successfully, an unsuspecting investor is making portfolio investments in the shares of this company, watching them grow. And the company at this time is on the verge of bankruptcy. Naturally, soon its shares will depreciate, bringing the investor only losses.
Comprehensive economic analysis of the enterprise
A comprehensive economic analysis of a company is an analysis of the financial condition of an enterprise that issued shares and placed them on a stock exchange. A lot of thick books have been written about how to conduct a comprehensive analysis, so it will not work out in full detail in this article even with all the desire. But despite the fact that it takes a lot of time to study it (at least to read the textbook), it is quite simple to conduct it. To conduct a comprehensive analysis of the enterprise, you need the financial statements of the company (you can download it on its official website) and some kind of spreadsheet editor, for example, Microsoft Excel.
The analysis includes the calculation of the most important parameters of the financial condition of the enterprise, such as financial stability, liquidity, profitability, solvency. Based on these indicators of the enterprise’s activity, it can be determined whether the company is bankrupt and whether there is a threat of bankruptcy for at least the next 3-4 years.
How many companies will have to check
After the launch of the program for access to the stock market, the trader will be presented with a list of companies whose shares are currently quoted on the market. The question arises: how many companies need to be analyzed? The answer to it depends on several factors. It:
- amount of investment deposit;
- investment strategy (depends on the type of portfolio investment and how the profit will be made - by receiving dividends or subsequent resale of shares);
- the term for which it is planned to place funds;
- acceptable level of risk;
- desired income level.
In order for financial portfolio investments to be profitable and reliable, you need to check as many companies as possible. Ideally, it is necessary to conduct a full analysis of all enterprises whose shares are quoted on the market. This is too laborious and time consuming process. You can go for a trick: make a small overview of all companies, selecting only those that are suitable for the selected type of portfolio investment, and conduct an analysis of these enterprises. In any case, if an investor is counting on a good result, he cannot limit himself to analyzing several firms. The more companies he studied, the higher the chance to create an effective portfolio.
Real portfolio investments usually include stocks of 5-6 companies plus bonds and bills, but there are also more securities. But this rarely happens, as it leads to the fact that it becomes more difficult for an investor to keep track of changes, as the amount of information that needs to be processed increases.
Which stocks provide growth income
A growth strategy is a portfolio investment of an enterprise, the growth of which is planned to be ensured by an increase in the prices of purchased securities. Which enterprises are most suitable for such a strategy? First of all, these are start-up companies. They are just starting and they have cash problems: banks are reluctant to issue loans. The vast majority of investors are afraid to invest in a new "dubious" project, so they are forced to invest almost all of the profit they get into the enterprise itself. This leads to the fact that the prices of their shares are growing rapidly, but can fall no less quickly and collapse. Dividends are not paid, as all funds are invested in the development of the company.
New companies are always high risk and high profit. If the company has been operating for less than 10 years, it is considered new. It is very difficult to analyze them. Investors rely mainly on financial reporting data rather than on technical or fundamental analysis.
Securities for dividends
Investors who wish to receive income not due to the growth of shares, but due to dividends issued by enterprises, must buy the securities of those companies that have been operating for a long time. Such companies usually have good profits and almost completely own the niche that they have occupied for a long time. Their competitive advantages are undeniable - they do not need to invest in expanding production and advertising. To attract additional funds, they are ready to generously pay dividends to their shareholders.
However, such stocks have one drawback - they are expensive. Such securities provide the most stable income, but the ratio of invested capital to profit is not too high. Such investments are the least risky type and are suitable only for a very conservative investor with large capital.
Typically, portfolio investments are made in the form of packages of securities of both new, developing companies and long-standing companies that regularly pay dividends to their shareholders. They are combined in different proportions. This is done in order to regulate the risk level of the investment portfolio. Three types of combinations are distinguished in which portfolios are classified as high, medium and low risk.
What securities are more profitable to purchase: Russian or foreign companies
Many beginning investors are interested in whether they can make portfolio foreign investments by buying securities of foreign companies, or is it prohibited by law. Definitely difficult to answer. Although in world practice buying stocks and making international portfolio investments is a common thing, novice investors may encounter some difficulties. The thing is that the threshold for entering foreign stock exchanges is much higher than on the domestic market. Entrance is available only for those who can deposit at least $ 2,000. In addition, shares of some foreign companies are not sold to foreign residents. You can try to purchase them through bank receipts, but this is a more risky way to make such portfolio foreign investments.
Another problem is the different structure of the economy. In other countries, completely different rules and standards for the preparation of financial and accounting statements have been adopted. Other methods for evaluating assets and performance are used. Other legislation. It will be more difficult for an investor to assess the real situation and make an appropriate decision on the purchase of securities.
What risks can an investor face?
Any economic activity in one way or another is associated with some risks. Investing is no exception. Despite the fact that portfolio investment is carried out in the form of purchase of blocks of shares and as a financial instrument is considered less risky than direct or simple investments, there is always a risk of losing part of the funds. The following are the risks an investor may face:
- Financial risk. This risk is associated with natural fluctuations in the prices of stocks and bonds that make up portfolio investments. If the investor chose the wrong time for the purchase of securities, this can lead to losses.
- Political risk. The political situation, laws and changes made by lawmakers to these laws can lead to unforeseen expenses and losses. For example, if a new tax is introduced or trading rules on the stock exchange are changed.
- The risk of fraud. All companies whose shares are listed on the stock exchange must publish financial statements, the accuracy of which must be confirmed by an audit (the report must be accompanied by an audit report). But still, there are companies that manage to provide inaccurate reports to investors in order to increase the amount of funds raised or to hide the close probability of bankruptcy.
- Risk of loss of deposit. Often investors use financial leverage (credit wing) during stock trading. This tool makes it possible to purchase more securities, but has one drawback. If the market does not go as the investor predicted, this can lead to a complete or partial loss of the deposit.
- Reputational risk. Various factors influence the price of shares, one of the most significant is the company's reputation. Negative news may lead to a collapse in the prices of securities included in the investment portfolio. This will lead to unforeseen capital losses. This is especially evident in the example of portfolio foreign investments in foreign IT companies, when any negative news leads to a drop in stocks and a loss of money by investors.
These are the main risks that an investor may face. The risk of fraud is considered the most dangerous, since the bankruptcy of an enterprise means an almost complete loss of invested funds. It is impossible to avoid risks in investment activity, but completely to reduce it. For this, portfolio investments were invented.
Self-investment or trust: which is better?
In addition to brokerage, banks offer other services. So, some (mostly large) banks offer trust management services, thus performing the functions of mutual funds. Investors are invited to acquire a share in the portfolio of investments acquired by the bank. Moreover, there are options.
Usually, there are three types of portfolio investments to choose from - these are portfolios with low, medium and high risk. You can find out what securities are included in a particular case on the bank’s official website, in the appropriate section.
When transferring to trust, risk factors should be considered. Indeed, from the fact that the funds were invested in an already collected investment portfolio or under the control of another trader, albeit more experienced and prepared, the risk of losing funds does not go anywhere.
Neither the bank, nor the fund, nor the management company are responsible for the loss of funds transferred to it for investment purposes. - , . . . :
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