How to build a stock portfolio • [5 Easy Steps]
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You can diversify and reduce the risk of your investments by building a strong stock portfolio – a collection of assets that includes investments such as stocks, bonds and exchange-traded funds (ETFs).
Anyone can build a successful stock portfolio with the right strategy. But you need to integrate some steps and maintain the wallet. In this guide, Benzinga provides a step-by-step strategy for build your stock portfolio.
How to build a stock portfolio
Covering all your bases when building a stock portfolio increases your chances of growth. You need to analyze the key aspects and integrate them into the strategy that works best for you.
Step 1: Choose your investment format
You can build a portfolio in several ways.
If you are a self-directed investor, self-directed investing allows you to trade stocks. You must open a self-directed brokerage account, allowing you to choose the securities in your portfolio.
The advantage of this account is that you decide when to buy and sell stocks. The downside is that you don’t have a professional to guide you.
Some investment companies offer portfolio management by robo-advisors. This is an automated service that relies on computers rather than financial advisors to build and manage your portfolio.
Investment firms use algorithms and variables such as the age, income, and risk tolerance of the investor to make trading decisions before the program. This service offers automatic rebalancing — reallocating your portfolio to balance it out and reduce risk.
Open an account with a broker or an investment adviser to set up a stock portfolio is the simplest method. It is especially suitable for new investors or those who do not have the time to manage a portfolio. The broker or advisor builds and manages a stock portfolio based on your profile.
Investors appreciate the convenience of having a licensed professional to manage their portfolio. But they have to pay brokerage fees. The risk is that the broker’s portfolio management determines the investor’s growth.
A hybrid market allows traders to use automated trading systems and floor brokers to execute trades on an exchange. The New York Stock Exchange (NYSE) is an example of a hybrid market. This investment method is suitable for large institutional clients and wealthy individuals.
Floor brokers executing trades are slower and more expensive than an electronic system. But the main advantage is that they use their judgment to time trades. Most hybrid markets are moving away from floor brokers and towards electronic order execution.
Step 2: Choose an investment style or strategy
Whether your investments are self-directed or through a broker, you will need to determine a portfolio strategy. You need to consider several factors such as risk tolerance, return expectations and liquidity requirements.
Your age plays a crucial role in determining strategy. Young investors may opt for higher-risk investments because they have more time to rectify mistakes than investors nearing retirement. The amount of your income and its stability will also determine your risk appetite. High-income people may take greater risks than low-income people.
You also want to consider your motivations for investing – is it quick profits or to increase your net worth through long-term investments? The type of assets you choose will determine certain aspects of your strategy. For example, some online brokers allow you to add cryptos and stocks to your portfolio. Cryptocurrencies, for example, are highly volatile and carry many risks.
Managing a portfolio takes time and expertise. Determine if you have both. Otherwise, a broker might be your best option.
Even brokers carry risks such as an underperforming portfolio and high fees. Your selection of assets and brokers determines how quickly you can liquidate the assets. Make sure the liquidity and withdrawal period match your goals.
Step 3: Create goals for your portfolio
Everyone invests for different reasons. Some investors want to grow their wealth while others want to use the profits for a purchase, such as buying a house.
You need to know your investment goals. This is important because it determines how much time and money you need to complete the goal. You have less time to save for college, for example, than for retirement.
Your goal gives you an idea of whether it is achievable. Investing several hundred dollars a month for ten years is less likely to make you a millionaire than buying an expensive car.
Step 4: Select a diverse range of investments
You don’t have to limit your portfolio to just stocks. In addition to choosing individual stocks in different sectors, you can venture into other assets such as real estate.
Various industrial sectors: Equity investors avoid putting all their eggs in one basket by investing in various sectors. Certain sectors of the economy are dependent and a rise in energy costs can lead to a decline in the materials sector. To avoid investing all of your funds in one declining industry, choose stocks in multiple sectors.
REITs: You can invest in a publicly traded real estate investment trust (REIT). Other options are to buy shares of a mutual fund or ETF. In fact, 145 million Americans have invested in real estate through REITs, with many accessing it through mutual funds in their 401(k) and retirement plans.
Index funds: An index fund tracks a market index, usually made up of stocks and bonds. Investing in an index fund is simple and usually comes with low fees.
Crypto-focused stocks: Investing in crypto stocks can complement your crypto holdings and spread the risk across different sectors. Several blockchain stocks have risen significantly over the past few years.
Alternative investments: Minimize your risk even further by buying bonds, cryptocurrencies and real estate. Other alternative investments include art and wine. An all-weather portfolio can endure because the volatility of a falling asset is offset by a rising asset. To achieve this balance, your portfolio must consist of several assets.
Step 5: Rebalance your portfolio as needed
Successful investing means buying low and selling high. An increase in assets that you did not sell is unrealized profit. You sell the assets to realize the profit. Investors do this to lock in profits and adjust the weight of different assets in their portfolios.
This is called rebalancing a portfolio. The best investors don’t hold a stock forever. They liquidate it to make a profit before the stock loses its value. When they feel the price of the stock they sold is low, they can buy it again.
Benefits of a stock portfolio
Building a stock portfolio allows you to take advantage of several advantages.
Retirement planning: Investing in stocks is a convenient and simple way to ensure a comfortable retirement. Your portfolio tells you the average annual return. This allows you to determine if you need to contribute more to reach your goal.
Saving for now: Unforeseen circumstances arise when you least expect them. And the stocks serve as a safety net for rainy days. Even if you don’t have any reserves, deciding to build a portfolio encourages you to start saving right away.
Shares are liquid: You can easily convert your shares into cash in a short time if you have an emergency. Otherwise, you might feel like the stock price is high and it’s time to sell. Buyers are generally available to purchase your shares.
The stock market is generally easy to understand: Even novice investors understand that when a listed company exceeds earnings expectations, its stock price may rise. And if the company is embroiled in a scandal, its stock may plummet.
Do investors need help with stock portfolios?
It’s not just beginners looking for help with investing; experts also do it to have an advantage over other investors.
Brokers offer advice: Some brokers have access to information inaccessible to many novice retail traders and investors. They can point their clients in the right direction and help them manage their portfolio.
Online brokers educate consumers: In addition to offering a trading platform, many online brokers offer educational tools. Some brokers have a knowledge base of videos, articles, and newsletters that educate consumers about trading and the markets.
Platforms like Benzinga offer a lot of financial information: The Benzinga website has free information on everything you need to know about stocks and other assets. Serious investors who want to have an edge over others need a wealth of information – get access to Benzinga Pro.
Financial advisors can help consumers build larger portfolios: Financial advisors have the expertise and time to help you manage risk and increase growth by expanding your portfolio.
Compare Stock Brokers
Finding a stockbroker who can help diversify your portfolio and protect it from volatility is time-consuming and risky. Benzinga has made the search easier by connecting you with reliable brokers.
Frequently Asked Questions
What does a good stock portfolio look like?
What does a good stock portfolio look like?
A diversified stock portfolio consists of a wide range of investments. Not only do you have to invest in stocks from different sectors, but you can also buy different assets such as bonds and real estate.
How much do you need to build a stock portfolio?
How much do you need to build a stock portfolio?
Some brokers do not have a minimum requirement. You can open an account without funding it. If you start with an initial investment of $1,000 and contribute $100 per month, you’re well on your way to building a stock portfolio.