What is a stock portfolio? Simply put – it’s a collection of stocks. To say that it is simply a collection of stocks and nothing more, would be an injustice. There is a lot more to a Stock Portfolio.
Let me draw the similarity to an artist’ portfolio – you probably know an artist right? If not – let me use the example of a very well-known artist from history – Michelangelo
Michelangelo di Lodovico Bounarroti Simoni (known simply as Michelangelo) was an artist during the Renaissance period. He is most famous for creations such as the Pieta, his painting of The Last Judgment scene on the ceiling of the Sistine Chapel, and of course, David. These masterpieces, as well as many of his other works during his lifetime, are his portfolio.
So - just as Michelangelo’s pieces of art make up part of his artist portfolio, a stock investor’s investments are contained within his/her stock portfolio.
The origins of the term “Portfolio” can be traced to both the Italian and Latin languages. From the Italian, the word combines “portare” (meaning: carry) and “foglio” (meaning: sheet of paper). From the Latin, “portfolio” has been taken from the word “folium” (meaning: leaf). So taken literally, “portfolio” means to carry a paper/leaf.
So - In both cases, whether concerning art or language, the word “portfolio” means simply to hold or have a store of something.
The Importance of a Stock Portfolio
When a stock trader invests in stock, it is very important that they take great care to monitor the activity of their stock in the market. Why? Because stock activity can alert you not only when there is a potential loss, but also gain! It follows therefore that the more investments a stock trader makes, the more important it becomes to have a well-organized stock portfolio.
The collection of investments which a stock trader owns, the various graphs, charts, and/or tools (otherwise known as plans) used by a stock investor to manage and monitor their portfolio might look something like this.
Diversification is a strategy whose main objective is to create as little risk as possible for a stock investor. What happens in diversification can been found directly in the name of the term. If something is diverse it has a lot of variety. When we add the suffix, “-ification”, to the end of the word, diverse, the word changes from being a noun to a verb.
So - when a stock trader creates a stock portfolio he/she is attempting to diversify his/her investments. And why would this diversification be good thing?
“Sharing The Love”
Diversity equals security. It is important as a stock investor to invest in many different kinds of stocks because it reduces the financial risk of losing significantly.
For instance, if you have invested in only scooter manufacturing companies and the scooter market crashes, you would stand to lose everything. But, if you spread your investments not only into scooters, but also into moon-shoes, trampolines, and water pistols, you would only loose a fourth of your investments when the scooter market crashes. You get the point…
In fact, some advisors recommend that you should not simply diversify your investments within the stock market, but in other investment media like stocks, gold, bonds, etc.
In summary – one of the most important parts of your stock trading strategy is managing and monitoring a diverse portfolio that has been put together strategically, through a plan.