In the recent crisis, the topic of investment can be very relevant. Confidence in securities is back. To one degree or another, the economic course of world financial institutions will be building a strong market economy with the necessary turnover of securities and vigorous investment activity in the conditions of long-term financial stability. That is why issues of competent, optimal behavior in the market are inevitable and are of paramount importance. In such conditions, investors feel the need for developed and effective economic technologies. And therefore, an important factor for active productive actions is the creation of an investment portfolio. However, portfolio investment - what is it? What is their importance and what is the essence of such technologies?
Profitability and risk
It is difficult to find securities that are both highly profitable, highly reliable and highly liquid. Typically, papers have one or two of the above qualities. Portfolio investment is the distribution of the investment portfolio potential between different groups of assets. The goals and objectives initially set during the formation of the portfolio determine the percentage ratios between groups and types of assets. Proper accounting of investor needs in the formation of an asset portfolio, which would combine stable profitability and acceptable risks, is the main task for any manager in financial institutions. Portfolio investment is a wonderful investment method that allows you to find a balance between profitability and risk.
Who makes investments
Attracting investment is a way of using financial resources for long-term investments. Investments are made by individuals or legal entities, which are divided into investors, players, speculators and entrepreneurs, depending on the degree of commercial risks. Who are they? An investor is more interested in minimizing risks. An entrepreneur invests at a slightly higher degree of risk. The speculator is ready to take a predetermined risk. And a player is a person who is ready for any degree of risk. Investments in Russia attract all participants - from large investors to players and speculators.
Types of investments
What are the investments? Direct, portfolio, venture and annuity. It is worth sorting out each concept.
Venture capital is a risky investment, which is an investment in new areas of activity that can show high returns, but also have a high degree of risk. Venture capital is usually distributed between unrelated projects for a quick return on investment.
Direct - this is an investment in the authorized capital of the subject to subsequently derive income and obtain the right to participate in the administration and management of the subject.
Portfolio investments are processes associated with the formation of an investment portfolio, which is a combination of acquired securities, as well as other assets. A portfolio is the sum of investment values that serve as a tool to achieve the goals previously set by the depositor. By and large, financial portfolio investments can contain both papers of the same type (stocks) and a wide variety of values (bonds, mortgage certificates, certificates of deposit and savings, insurance policy, and so on).
An annuity is a type of investment that brings the investor income at certain intervals (pension and insurance funds).
Portfolio Importance
The investment strategy is determined by such factors as directly the capabilities of the investor himself and the market condition. Portfolio investments have a number of advantages and features over other types of capital investments, precisely because of the presence of a portfolio, which means securities belonging to a legal or physical person. In developed stock markets, the portfolio already acts as an independent product, and its sale in shares or wholly satisfies the requirements of the investor for making investments in stock markets. Some investment qualities are being sold on the market with the specified parameters and the relationship between risk and profitability, which can be improved in the process of managing this portfolio.
Portfolio Investment Attractiveness
Portfolio investment is a convenient tool that allows you to monitor and evaluate the results of investment activity in different sectors of the market. As a rule, such a portfolio is a set of bonds and stocks with different degrees of risk, as well as a certain number of securities having a fixed income guaranteed by the state, that is, which have a minimal risk of losses on current receipts and the principal amount. Creating a portfolio is an attempt to improve and optimize investment conditions when a set of securities is endowed with characteristics that are unattainable by a single paper, but possible only with a combination. In the process of forming an investment portfolio, new qualities are achieved with the necessary characteristics for a set of securities. Thus, portfolio investment is a tool that provides the required return with minimal risk. It is believed that these types of money management indicate the maturity of the stock market in the country. This is absolutely true, since portfolio investments in Russia were virtually impossible in the mid-nineties.
Who is interested in portfolio investing?
From a practical point of view, there are two types of interested customers. The first is those who are faced with the problem of placing free funds. These include inert and large state corporations, various funds. The second type is medium-sized banks, small brokerage houses that have caught the needs of the first type of customers and put forward the idea of portfolio investment as bait. Naturally, it is difficult to talk about competent customers in the CIS, as the process of forming professional stock market participants and qualified large investors is still far from complete. However, demand is increasing every year, as the investment market (portfolio market) is growing.
Portfolio Formation Principles
There are several key considerations to keep in mind when creating your investment portfolio:
- investments must be safe (investments must be as invulnerable as possible);
- income must be stable;
- it is necessary to adhere to considerations about the liquidity of investments (that is, the ability to quickly acquire or sell them).
Naturally, not a single security possesses all these qualities at once, which potentially increases the risks of portfolio investments. However, the very concept of a portfolio implies a compromise. For example, if the stock is reliable, then it will have a low income, since those who prefer reliability will pay more and “bring down” the income. Portfolio investment is the achievement of the optimal combination of profitability / risk for the investor, that is, a set of tools should increase income to the maximum and reduce risks to a minimum. This raises the question of how to determine this proportion between risks and profitability. There are several principles for building a classic portfolio: diversification, sufficient liquidity and conservatism.
The first principle is conservatism
The ratio between risky and reliable shares should be such that the possible loss of a risky share is covered by income from a reliable part. Investment risk consists only in lower income, and not in the loss of principal. However, of course, without risk it is impossible to count on high incomes.
The second principle is diversification
By and large, this is the main principle of any investment portfolio. Its essence is "not to put all the eggs in only one basket." That is, do not invest in only one type of paper, no matter how profitable this type of investment may seem. Such restraint avoids damage. Reducing risk through diversification means that low returns on some securities will be offset by higher returns on other securities. Attachments are displayed both between segments and inside them. Ideally, risk is minimized by including different types of concepts such as investments: business, real estate, securities, precious metals and so on. This is closer to the ideals of large investment: regional and industry diversification.
The third principle is sufficient liquidity
The essence of the principle is to keep a certain part of quickly traded securities not lower than a sufficient level for conducting unexpected profitable transactions. Practice shows that it is beneficial to keep part of the capital in highly liquid assets, because it allows you to quickly and quickly respond to possible changes in market trends.
Portfolio Investment Income
Portfolio investment is one of the investment methods, the income from which is the gross profit from all securities that are included in this portfolio. However, there is a problem of matching profit and risk, which must be resolved promptly. The portfolio structure must be flexible and constantly improved, taking into account the wishes of investors regarding the same risk / profit ratio. Considering such a question as creating a portfolio, it is necessary to determine the main parameters:
- selection of the optimal type of portfolio;
- assessment of an acceptable combination of profitability and degree of risk;
- determination of the initial composition of the portfolio with the sorting of securities by specific gravity (level of risk / income).
Undoubtedly, the question arises of what types of portfolio investments are.
The main types of investment portfolios
Attracting investments through the formation of a portfolio has an undeniable advantage in the form of an operational solution to various specific tasks. To do this, use several types of portfolio, which are, in fact, its main characteristics, based on the ratio of risks and profitability. An important attribute for classifying portfolios is the source of income. This may be an increase in value or current payments - interest, dividends. There are only two main types: a portfolio of income (aimed at earning profits from dividends and interest) and a growth portfolio (focused on the increase in the value of investment values that make up the portfolio).
Growth portfolios
The purpose of the growth portfolio is the profit from the growth in the value of assets. This type can be either aggressive (maximum profit, taking into account high risks), or conservative (moderate profit and minimal risk). An aggressive portfolio is usually less stable, as it is based on young promising companies. Conservative consists of shares of larger enterprises. It has much greater stability and lower risks, but also significantly less profitability.
Income portfolio
The income portfolio includes stocks that are characterized by moderate growth in their exchange rate and stable dividends. The goal of creating such a portfolio is to obtain a stable income with minimal risk. Objects for this type of portfolio investment: reliable market instruments with a balanced ratio of market value and interest paid. There are also two subtypes of this portfolio:
- Regular income portfolios that bring an average level of income, but are formed from reliable assets;
- portfolios of profitable securities, which consist of bonds and securities, which bring higher returns, but retain an average level of risk.
Combined Income and Growth Portfolio
A combined portfolio investment is an attempt to avoid losses from both low interest or dividend payments, and from a fall in the value of an asset in the stock market. Some of the securities bring an increase in the cost of capital, while the other - income. In this case, the loss of one of the two parts will be compensated by the other. There are several types of this type of investment:
- Dual-use briefcases, which include securities that bring owners income while increasing invested capital. In this case, we are talking about securities of dual-use funds that issue two types of securities. The former are focused on high income, and the latter on capital gains.
- Balanced portfolios that imply a balance not only of income, but also of the risks that accompany securities transactions. Therefore, this type of investment portfolio consists of approximately equal proportions of highly profitable assets and securities with rapidly growing value. Such a portfolio may also include such stock market instruments as preferred and ordinary shares, bonds.
Portfolio Structure and Investment Goals
Assessing an acceptable combination of income and risk in accordance with the calculation of the specific gravity of a portfolio consisting of securities with different levels of income and risk is the main goal of any investor. This task is a consequence of the general principle operating in the stock market: the greater the risk of a single paper, the more income it should have. This principle holds true in the opposite direction. It is this principle that should be followed when choosing the type of portfolio and the further strategy for managing it: conservative, aggressive, moderately aggressive, irrational, risky, unsystematic, highly reliable and low-profit or vice versa. The enterprise investment structure and portfolio management strategies are directly dependent on the investment objectives.