What is the need for the stock portfolio?

• Building a stock portfolio helps new investors to cushion investment-related risks and increases the scope of getting more profits. 

• Helps investors build sound strategies on investment plans and revaluate the investment plan composition as per the current market condition so that investors can benefit maximum with the existing money. 

• Based on immediate financial needs and market conditions an investor can quickly customise its investment plans. 

• Helps an investor understand which investment plans will work best under what market conditions and distribute money into different investment plans. 

Types of different stock portfolios

Based on investment strategies, here are some popular portfolios:

• Income portfolio: This portfolio focuses on investing in such plans that give a steady flow of money from the profits distributed by the corporates which are known as dividends. An income portfolio generates a positive cash flow to return a chunk of its profits to investors instead of their tax status. 

• Growth portfolio: In a growth portfolio, the investor invests in stocks of a company that is in its active growing stage. Building a growth portfolio is associated with higher risks and such portfolios are popular for presenting high risk and reward aspects. 

• Hybrid portfolio: Hybrid portfolios are a mixture of investments into stocks of blue-chip companies or high-grade government bonds and passive investments like -art. Investing in a mixture of stocks and bonds in a fixed proportion offers stability. 

• Value portfolio: Investors building value portfolio invests in profitable companies whose shares are priced lower than their fair price. This type of investment happens when the economy is sliding. When the market revives, the low-priced investments generate higher returns. Investors building such stock portfolios have a low appetite for risks.

Things to keep in mind for a new investor while building a portfolio 

• Diversify: Investing in one or two stocks of companies is not sufficient. Risks are high when the investor focuses on the stocks of few companies, it is equivalent to putting all the eggs in one basket. An ideal portfolio should have 20-25 names, but again they should not invest in few shares of each company as it would not give better returns. 

• Regular buying: To strengthen the portfolio, it is necessary to invest regularly since doing this will help to increase your wealth over a long period. The habit of investment discipline should be adopted by every investor. If the income level rises, investors can invest more amount. 

• Reviewing investments: For new investors who have limited knowledge about a sector or stock should develop the habit of reviewing stocks regularly. Where one strategy is to buy and hold stock, but should not imply that we do not keep an eye on other profitable investments, as market prices vary swiftly. 

• Time-bound investments: Investors should also be diligent while putting in investment plans. For example- Retired individuals should invest in bonds and cash as risk levels associated are low. For young investors who have just begun their career, they can invest more into the high-risk investment plans that offers rewards as well. 

What is market value? 

Market value, also known as market capitalisation, is the value of the company’s stocks in the stock market. It is calculated by multiplying the share price by the total number of shares that are trading. The formula for market value is: 

Market Value = Current Market Price Per Share x Total Shares Outstanding

Market value fluctuates throughout because a company’s share price constantly varies as investors sell and buy stocks. 

The difference between market value and book value

Book value is the valuation of the company that considers hard financial figures ie. actual assets and liabilities, whereas market value is the valuation determined by its share price, which fluctuates based on the investor’s perception.

• Updated numbers:  Book value is not an updated value, since it is taken from the company’s financial statements that come quarterly or annually, therefore, the value can change from one reporting to other without any information that happens within the period. Market value information is available throughout the day. 

• Accuracy:  Market value sometimes may not be accurate as it is based on investor’s perception. While in book there is a chance of manipulating the financial figures but yet it is an insightful number that indicates the financial health of the company.

Using book value and market value to determine the right stocks

• When book value is higher than the market value it means that the stock is undervalued. It also means that investors are not considering a company’s actual financial numbers from the balance sheet and the strength of its operations. In this case, purchasing a company’s stock can prove to be beneficial as its share price is likely to increase and give better returns on selling, once the market realises the company’s intrinsic strength.

• If the book value is lower than the market value, it means that the stock is overvalued or overpriced. Investors holding shares of such companies should either sell the stock or not buy, as the market correction will cause the share price to drop. 

• If the market value of a company is above its book value but starts to fall below its book value, it indicates a loss of investor confidence in the company.

Book value and market value are two different calculations that indicate a company’s overall financial strength. Comparison between the two will help investors to determine if a stock is undervalued or overvalued given its asset, liabilities, and its ability to generate income.