Portfolio investment - what is it?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Portfolio investments are investments in 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 shares are bought not to obtain a board share in any company, but 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 sum, they represent a portfolio consisting of stocks, bonds and bank receipts. In order to compile an investment portfolio, it is necessary to have an idea of where and how securities can be purchased, by what methods they should be evaluated and how to predict probable price changes for them.

Return on investment can be obtained from company-issueddividends or by increasing the value of the acquired securities. There are some features of buying and selling stocks and bonds, ignorance of which can lead to the loss of part or all of the invested capital.

Portfolio investment is the purchase of up to 10% of the company's shares. If the number of shares purchased exceeds this percentage, then the investment is considered direct. They are mainly de alt with by professional traders, and investors only buy parts in an already completed portfolio of securities. If an investor makes investments through mutual funds and various funds, then he does not need to have special knowledge regarding stock 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 succeed in this activity. A misunderstanding of how the stock market works, or a lack of knowledge of the basic techniques of working with securities, can lead to the fact that portfolio investments will bring only losses instead of profits. The first thing an investor needs to do is access the stock exchange.

Where to start

You can buy securities either from friends or on the stock exchange. Most investors do not have such friends from whom they could buy shares, so they go to the stock market for purchases. Access to it is provided by the major banks of the country. In order to start doingdirect and portfolio investments, the investor must conclude an appropriate agreement, deposit the initial amount, download and install a special program on a 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 be buying and selling stocks, but he needs some more knowledge to be successful.

What you need to know to build a portfolio correctly

In order for direct and portfolio investment to be a profitable investment, it is necessary to determine how the return on investment will occur. This can be both income in the form of annually accrued dividends, and income due to the growth of shares. This issue must be resolved before buying stocks and bonds, as it affects the choice of companies whose shares will need to be purchased.

Any investor, even one whose deposit has six or more zeros, knows that money is a limited resource. To get the maximum profit, you need to decide on an investment strategy. Spreading cash to buy stocks and bonds in too many companies will have no effect. Therefore, it is first necessary to determine the composition and amount of portfolio investments. Determine which securities to buy. What is the level of risk and return on these securities. And for this you need to analyze. Traders and dealers in their work on the stock exchange use three types of analysis: technical, fundamental and comprehensive economic analysis of enterprises whose shares theyplan to buy.

Fundamental analysis

Fundamental analysis of portfolio investments is the study of news, reports, historical information about the activities of enterprises whose shares are supposed to be bought. Also studied are data on the economy of the state as a whole: statistical data, laws and legal acts. Mainly tax legislation and laws on investment activity. The trader's duties also include the analysis of annually published reports and performance indicators of companies by various rating agencies.

Fundamental analysis is difficult because you have to process a large amount of data, and decisions must be made quickly. At the same time, the use of any analytical tools, computer programs, formulas is impossible due to the characteristics of the information received. It is especially difficult to conduct for portfolio investments, as there is more data to process.

Due to the complexity of fundamental analysis and its low efficiency, traders practically do not use it in their activities, but study it, since in some cases it can be useful. For example: the investment portfolio includes shares of a mobile phone company in country N. And then the investor learns from the news that a coup d'état has taken place in country N and nationalization of enterprises is planned. If the investor does not rush to take some action to save the money invested, he risks losing his investment in these securities in full.

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. It is believed that all factors have already been taken into account in the price chart, plus history often repeats itself. Ups are always followed by downs, market movements are predictable and you can safely make predictions.

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 also influence price growth. As a result, the illusion is created that the company is working successfully, an unsuspecting investor makes a portfolio investment in the company's shares, watching them grow. And the company at this time is on the verge of bankruptcy. Naturally, soon its shares will depreciate, bringing only losses to the investor.

Comprehensive economic analysis of the enterprise

Comprehensive economic analysis of a company is an analysis of the financial condition of an enterprise that issued shares and placed them on the stock exchange. Many thick books have been written about how to conduct a complex analysis, so it will not work to consider it in 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 enterpriseyou need financial statements of the company (can be downloaded 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 performance indicators of the enterprise, it is possible to determine whether the company is bankrupt and whether there is a threat of bankruptcy at least within the next 3-4 years.

How many companies will have to check

After launching the program for access to the stock market, the trader will be presented with a list of companies whose shares are currently listed on the market. The question arises: how many companies need to be analyzed? The answer to this depends on several factors. This is:

• investment deposit amount;
• investment strategy (depends on the type of portfolio investment and how the profit will be made - through the receipt of dividends or the subsequent resale of shares);
• term for which it is planned to deposit 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 complete analysis of all enterprises whose shares are listed on the market. This is too laborious and lengthy process. You can go for the trick: make a small overview of all companies, choosing only those thatsuitable for the selected type of portfolio investment, and analyze these enterprises. In any case, if an investor expects a good result, he cannot limit himself to analyzing several firms. The more companies he has studied, the higher the chance of making an effective portfolio.

Real portfolio investments usually include shares of 5-6 companies plus bonds and bills, but there are also more securities. But this rarely happens, as it makes it harder for the investor to keep track of changes, as the amount of information that needs to be processed increases.

Which stocks generate growth returns

Growth strategy is the company's portfolio investments, the growth of which is planned to be ensured by increasing prices for purchased securities. Which businesses are best suited for such a strategy? First of all, these are start-up companies. They are just starting out and have cash problems: banks are reluctant to lend. The vast majority of investors are afraid to invest in a new "doubtful" project, so they are forced to invest almost all the profit they receive in the enterprise itself. This leads to the fact that their stock prices rise rapidly, but can collapse just as quickly. Dividends are not paid, since all funds are invested in the development of the company.

New companies are always high risk and high profit. If the enterprise has been operating for less than 10 years, it is considered new. It is very difficult to analyze them. Investors are mostlyrely on financial statements rather than technical or fundamental analysis.

Securities to receive dividends

Investors who want to earn income not through the growth of shares, but through dividends issued by enterprises, should buy securities of those companies that have been operating for a long time. Such companies usually have good profits and almost completely own the niche they occupied a long time ago. Their competitive advantages are undeniable - they do not need to invest in expanding production and advertising. To raise 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 and profit is not too high. Such investments are the least risky type and will suit only a very conservative investor with large capitals.

Usually, portfolio investments are made in the form of securities packages of both new, developing companies, and long-running companies that regularly pay dividends to their shareholders. They are combined in different proportions. This is done in order to regulate the level of risk of the investment portfolio. There are three types of such combinations, in which portfolios are classified into high, medium and low risk.

Which securities are more profitable to buy: Russian or foreign companies

Many novice investorsI wonder if they can make portfolio foreign investments by buying securities of foreign companies, or is it prohibited by law. It is difficult to answer unambiguously. Although buying shares and making international portfolio investments is a common thing in world practice, novice investors may encounter some difficulties. The thing is that the entry threshold for foreign stock exchanges is much higher than for the domestic market. Entry is only available to those who can deposit at least $2,000. In addition, the shares of some foreign companies are not sold to foreign residents. You can try to purchase them through bank receipts, but this is a riskier way to make such foreign portfolio 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 of assessing assets and performance are used. Other legislation. It will be more difficult for an investor to assess the real state of affairs and make an appropriate decision to purchase securities.

What risks can an investor face

Any economic activity is somehow connected with some risks. Investing is no exception. Despite the fact that portfolio investment is carried out in the form of the 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 that mayencounter investor:

• Financial risk. This risk is associated with natural fluctuations in the prices of stocks and bonds that make up portfolio investments. If an investor chooses the wrong time to buy securities, this can lead to losses.
• Political risk. The political situation, laws, and changes made by legislators to those laws can result in unexpected costs and losses. For example, if a new tax is introduced or the rules for trading on the stock exchange are changed.
• Risk of fraud. All enterprises whose shares are listed on the stock exchange must publish financial statements, the reliability of which must be confirmed by an audit (an auditor's report must be attached to the statements). But still, there are companies that manage to provide false reports to investors in order to increase the amount of funds raised or hide the imminent possibility of bankruptcy.
• The risk of losing a deposit. Investors often use financial leverage (credit wing) during exchange trading. This tool makes it possible to purchase a larger number of securities, but has one drawback. If the market does not go as the investor predicted, this may lead to a complete or partial loss of the deposit.
• Reputational risk. The share price is influenced by various factors, 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 unexpected capital losses. This is especially evident in the case of portfolio foreigninvestments in foreign IT companies when some negative news causes stocks to fall and investors to lose money.

These are the main risks 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 it is quite possible to reduce them. This is what portfolio investments were invented for.

Self-investing or trust management: which is better?

In addition to brokerage, banks offer other services. Thus, some (mainly large) banks offer services of trust management of capital, thus performing the functions of mutual funds. Investors are invited to purchase a share in the portfolio of investments acquired by the bank. What's more, there are options.

Typically, there are three types of portfolio investments to choose from - these are low-risk, medium-risk and high-risk portfolios. You can find out which securities are included in a particular case on the official website of the bank, in the appropriate section.

When transferring to trust management, risk factors should be taken into account. After all, the fact that the funds are invested in an already collected investment portfolio or under the management of another trader, albeit a more experienced and prepared one, does not go away with the risk of losing funds.

Neither the bank, nor the fund, nor the management company is responsible for the loss of funds transferred to it for investment purposes. That is, if for any reason the invested funds are lost,no one will answer. The money will not be returned. To prevent this from happening, or to at least reduce the risk of such a development of events, you should choose a reliable investment company. When choosing a fund, you should pay attention to:

• life of the fund (bank);
• presence/absence of litigation of litigation related to non-payment of funds to investors;
• Amount of authorized capital;
• composition of investment portfolio.

Trust management - buying shares in mutual funds - more convenient. This is a good investment opportunity. Moreover, they have great opportunities in terms of foreign portfolio investments, access to which is usually closed for a simple trader.

The investor is not required to have any knowledge or skills in such a situation. The fund employs professional traders who not only know the theory of portfolio investment well, but also have experience in the stock exchange. They may also have access to information that is not available to a simple investor who decides to trade on their own. But giving his money to such funds, the investor must still be prepared for the fact that his funds may be lost due to the mistake of another person, just as if he had made these mistakes himself.