(4) Shortlist Different Kinds Of Stocks
It is one of the most important steps to build a well-balanced stock portfolio. Every stock is not equally stable & volatile in stock markets. It is perhaps true even for stocks from same sector.
If you want to prepare strong & rightly managed stock portfolio, you need to identify & pick only the best stocks out of many.
Stocks can be classified into different kinds depending on its stability & volatility. You just need to shortlist them before analyzing their growth potential in coming years.
Some of the different types of stock include:
(a) Growth Stocks: Securities of companies whose earnings are expected to grow significantly faster than other stocks in the market.
(b) Foreign Stocks: Securities of companies that carry out their business activities abroad. They are usually listed in foreign stock markets either as stocks or depositary receipt.
(c) Value Stocks: Securities of companies that are undervalued by the market as compared to their true worth.
(d) Defensive Stocks: Securities of companies whose products & services are in demand irrespective to economic conditions.
(e) Cyclical Stocks: Securities of companies whose share price is affected by ups & downs in the overall economy or business cycle.
(f) Blue-Chip Stocks: Securities of large & stable companies that continued to be profitable since long time.
(g) Income Stocks: Securities of companies that offer regular & steadily higher than average dividends than other stocks.
(h) Penny Stocks: Securities of companies that trade at no more than $5 per share (below Rs10 in India) & sometimes as low as 2 cents (below Rs1 in India).
(i) Speculative Stocks: Securities of companies with a high degree of risk.
(5) Research & Analyze Fundamentals Of Every Stock You Shortlisted
It is one of the most unbeatable steps to design a strong & rightly managed portfolio for beginners. Stock fundamental analysis is the basic process of finding a stock’s intrinsic value as opposed to the current valuation in stock markets.
Some of the necessary information needed to analyze a company’s fundamental includes financial statements, conference calls, press releases & news, analysts report, historical data, and analysts estimates.
Investors can perform fundamental analysis of a stock simply by investing little time & energy. The process of fundamental analysis combines economic, industry, & company analysis to derive a stock- current fair value & forecast future value.
In this process, projected profits & expected losses are also factored in. If fair value is not equivalent to current stock price then stock must be either overvalued or undervalued.
In such a situation, market price will ultimately gravitate towards fair value.
Image Source: Shutterstock