How to construct a portfolio as a beginner in the stock market

–  Mr. Jyoti Roy, DVP- Equity Strategist, Angel One Ltd

Introduction

Investment, as defined by many expert investors is a way of putting your idle money to work. Your labour gives you some benefits now, and if saved well, it can also give you amortised future benefits. Money is a tool to get things operational. The reason why companies get listed is to raise funds from the public in return for dividends and profits from the valuation. To invest in the market is to put trust in a business that you think will grow and keep your money safe, to the least.

Basics of Investing

Investing in the stock market is a trend these days, as is clearly evident from the rising market capitalisation. But investing is also an investor’s conscious choice, the opportunity cost being consumption expenditure and savings. This fact is essential to understand here that investing does have an opportunity cost and is not always a rosy picture as portrayed by sharks. Being mindful of money is the first step a smart investor can take towards beginning their stock market journey.

Having understood the risks involved in investing, we can now talk about the avenues for investment. Investment can be made in various assets widely tradable through most brokerages. It is suitable for amateur investors to start with instruments or assets rated as safe for investment. Blue-chip stocks are the best ones for the purpose as these are shares of reputable companies with reliable operations. Most amateur investors begin with passive investment as it allows them time to observe the market, keep the risk in check and not be too involved to restrict the involvement of human emotions.

Technological Advancements in the Sphere of Investment

The traditional investment practices used to be confusing and even inaccessible for many people. The investment advisory was not clear at most times, and the need for high-value deposits created a stigma in the minds of prospective investors. Those who actively invested were still aware of their options, given the clarity they had regarding their investments. On the other hand, passive investors often didn’t even realise how they lost money and on what.

The advent of technology in the financial sector has charmed tech-savvy investors while being a boon for passive investors. New age investment tools allow for better management of portfolios through accessible mobile apps. Now, the deposits and margins required are lower than ever, with intuitive interfaces making it easier for beginners to browse through the trade terminals. There are multiple indicators available that can be applied to the price charts to analyse the movement. Even automated algorithms can be used to trade on a specific logic that again helps bypass the instance of human intervention.

Diversifying the Portfolio for Safer Investing

Blue-chip stocks are good avenues for safe investments, but one needs to remember that risk and reward work hand-in-hand. Every investor needs to define their risk profile to identify the instruments that are suitable to them. With the chances of higher profits, the risk factor also increases. Following are some ways of diversifying your portfolio with risk factors in ascending order of asset allocation.

• Mutual funds of large-cap stocks
• Direct shareholding of large and mid-cap stocks
• Debt market instruments such as long-term bonds
• Money market instruments and short-term bonds

The capital market instruments are secure compared to money market instruments as financial institutions and professional brokers deal with them. Any instrument that yields better than inflation for the long-term is a safe investment bet. Value investing is a concept that sharks and whales rely on for safely multiplying their funds.

Final Thoughts

The instruments chosen for investment are based on charges that these several instruments attract, in addition to the associated risk factors. The charges and tax liability on the investable assets need to be balanced off with their yield to check the profitability of the funds. It is also hard to diversify much with a small amount, so starting with a few assets and then diversifying at the time of infusing more funds seems like the right way to go about it.

Coming back to the initial thought, there are many categories of assets, but not everyone has an in-depth understanding of them. Good research is always beneficial while acquiring any asset, which should be the case in the stock market. Most of the losing bets in the market are because those trades were either emotionally driven or lacked proper knowledge of the underlying asset. Be smart, be wealthy!