How to Add Stock to a Portfolio

Know how to create a diversified investment portfolio.

Adding stock to a portfolio involves assessing the current diversification of the existing portfolio, including all stocks, bonds, commodities, cash and currencies. The new stock addition should be considered in light of minimum income requirements and broad market prospects. Investors need to consider the best form of new investments, including exchange traded funds, mutual funds, foreign stocks or domestic stocks. Most importantly, investors should measure their overall risk tolerance and what long-term objectives and needs they need to meet before withdrawing funds.

Instructions

1. Add stock to an existing portfolio by examining your current portfolio holdings. Choose a stock that complements your existing holdings. Do this by making certain all stock has a certain minimum yield and certain expected positive return over the next three years. Stock dividends are important. They represent nearly half the total returns received from your stock holdings. Keep records of purchases, sales, industry type and dividend income for tax and reference purposes.

2. 

   Consider regular investment plans.

   Consider how you are going to add stock. Choose among mutual funds, individual stocks and exchange traded funds (ETFs). ETFs are single stocks made up of groups of similar stock. Mutual funds have many different purposes, objectives and management styles. Review your mutual fund choices through library holdings, or read the official company announcements directly from the Security and Exchange Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) database.

3. Consider the use of mutual funds if your existing portfolio does not contain many stocks. Using mutual funds will give you immediate diversification. If your portfolio consists mainly of cash, bonds and commodities, let no more than 25 percent of your assets be held in any one class or asset group. The majority of assets should be held in income stocks until you approach your retirement years.

4. 

   Careful planning creates successful investing.

   Think of your portfolio as a circle divided in 20 to 50 different slices. Each piece represents a stock holding that contributes dividends, long-term capital gains or both. No one piece is bigger than another and no piece represents an investment that is very much like another. For example, owning two cell phone companies is not diversified. Own a cell phone manufacturer and a cell phone provider is somewhat diversified. Owing a cell phone manufacturer and a commodities mining stock is real stock diversification.

5. Consider purchasing stocks with geographical diversity. A small portion of your portfolio should include companies in less developed countries that are showing steady growth in major manufacturing and export activities. Adding stocks of overseas companies helps diversify your portfolio away from the U.S. dollar and into other strong currencies.

Tips & Warnings

• Diversification is more important than any particular short-term trend.

• Choose stocks with a view to long-term earnings expectations and dividend growth.

• Buy foreign stocks through mutual funds to avoid currency transfers.

References

• The Securities and Exchange Commission Corporate Database

Resources

• New York Stock Exchange Resource Guide