How to Form a Stock Portfolio
Stocks offer investors unlimited growth potential. A single stock represents an equity stake in a publicly traded company, so your stock grows in value in line with increases in the value of that firm. Companies can drop in value, however, and some firms even go bankrupt, which means that stocks can ultimately become worthless. If you create a stock portfolio, you reduce your the likelihood of loss because you invest in a number of different companies rather than putting all of your eggs into one basket. Nevertheless, you still need to do your homework before you buy your stocks to ensure your holdings match your investment strategy.
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Instructions
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Review your bank account statements. Determine how much money you need to set aside both for day-to-day expenses and other costs you are likely to incur over the next two or three years. You should only invest money in stocks that you can afford to take some risks with, so do not invest money that you need to spend in a few months because a stock market crash could cause you to lose that money.
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Contact several local investment brokers. Go online to review the account offerings available through discount brokerage firms. Regular brokers charge trade fees and in many circumstances you can only buy stocks through a broker if you commit to investing a certain dollar amount. In return for the fees, however, you get the benefit of the broker's advice, whereas with a discount brokerage house you pay minimal fees and can invest small sums but you receive no investment advice.
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Establish a brokerage account at the broker or discount broker that best suits your needs. Deposit the money that you intend to invest in the brokerage account. If you deposit a check, brokers do not normally allow new clients to buy stocks until the payee bank has actually sent the check proceeds to the broker's account. This can take a few days.
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Ask your broker to provide you with stock quotes for companies that you would like to invest in. If you want to invest in a particular segment of the economy, such as the financial sector, then ask your broker to provide you quotes for stocks in that sector. If you use a discount broker, you can browse stock listings on the broker's website.
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Research the stocks that interest you. You can diversify by investing in international stocks as well as the stocks of U.S.-based firms. If you desire income, you can add preferred stocks, which pay fixed dividends, to your portfolio. Preferred stocks have less price volatility, though, so you can gain income at the expense of future growth.
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Submit a purchase request through your broker for a variety of different stocks in different sectors of the economy. A balanced portfolio normally contains some high-risk stocks in small-cap or up-and-coming companies as well as stocks in well-established large-cap firms. Review your portfolio at least once a year, at which time you may opt to sell highly priced stocks and replace those stocks with under-valued stocks that offer better growth potential.
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Tips & Warnings
A company's price-earning ratio tells you how much a company generates in net profits on a per-share basis. A firm's debt-to-equity ratio shows you much much a company has to spend on servicing its debt as a percentage of its book value or net worth. You cannot rely on these measurements to accurately predict future changes in the value of a stock, but a company with high debt levels may struggle more than once with minimal debt. A high price-earning ratio may suggest that people expect the company to perform well -- but there are no guarantees in investing.
While international stocks protect you in the event of a U.S. market crashes, foreign stocks also expose you to other kinds of risk. If the dollar weakens, your foreign stocks grow in value, but the opposite occurs if the dollar makes gains against foreign currencies. Furthermore, economic disputes and political unrest overseas can also have a negative impact on your foreign stock holdings.
