PORTFOLIO AND RISK
Stock Market sounds interesting when you hear the word, also a little fear is attached in the minds of people who think that it’s hard for them to understand. In our previous blog, we had been discussing about how one can enter in the stock market and what are the basics that we need to know, before entering into it. We are trying to create the stepping stones now, so that if we aspire to know more about it, in the coming future, then it will be easier for us to understand it thoroughly. So in this blog of Vyolve Paisa, we are going to discuss the most important aspect of the stock market, i.e. Portfolio.
So without wasting much of our time, let’s get started!
Let’s understand Portfolio with a simple example, say you are having a basket where you have different varieties of fruits, then the basket here is the Portfolio, and the fruits in the basket are your stocks. So why do we actually create a portfolio will be your first question, Isn’t it? Many of them might think about why to invest in different stocks, why not invest all your money in a single stock? In fact, there are many investors who say that choose an ideal stock and invest all your money in it. So as we all know, there are both pros and cons to it. See, we know this very well that when we are investing in the stock market or any investment we are making, then we are well aware that it involves a certain risk. The same is the case with the stock market, when we invest in the stock market it involves some risk, so we divide the risk into two parts i.e., Systematic risk and Unsystematic risk.
Unsystematic risk is the risk related to the company means that is company-specific. For example, if the company is not performing well or there is a fight between the board members or the production of the company has declined or the head of the company is not making the right decisions so the risk associated with such factors are termed as unsystematic risk. So the risk here is company-specific or we can say sector-specific. Now let’s discuss how to minimize unsystematic risk. To minimize the risk of unsystematic risk we perform diversification. Diversification simply means to diversify the risk. So, in diversification, we are not investing our money in one place but rather we are investing our money in different types. We discussed a little about this in our last blog, so now let’s discuss it in detail.
Diversification means that we are not investing in one sector but we are investing in different sectors. In that case, if one sector comes down then the other sector will be good. So in order to minimize the unsystematic risk, we go for diversification but the thing is even after diversification there is some risk and the risk that stays behind even after diversification, it is known as systematic risk.
Systematic risk is not company-specific it is because of government actions, market changes or the external factors. We can term coronavirus as systematic risk or we can say it to be an unexpected risk. So the question here arises is how can we minimize systematic risk. Before minimizing the risk we need to find the source of the risk or the actions which led to such risk, the factors on which the price of the stock market depends or the price at which the stock fluctuates. Some of the actions are: As the budget is launched, it influences which stock will go up and which stock which will come down. It is a systematic risk. If the budget is favourable of the stock, in which you have invested then the budget will be fruitful for you. But if there is something in the budget which is against your stock it would come up as a loss for you. For example, you have invested in the liquor industry and the budget specifies that the taxes for the liquor industry has been increased then it will be a loss for you. We term it as systematic risk.
Other than budget, there can be dividend, stock-split, bonus issue or right issue. You might have heard of Right Issue in the present time because Reliance Jio used Right Issue to cover its debt, might have heard that in news? Now, what is the right issue? We will discuss this in our next blog. So the only reason for the portfolio is such that we can minimize both the risks so that we can diversify and minimize the unsystematic risk. And to minimize the systematic risk, we do hedging. Now, what is hedging? We will discuss that in the coming blog of Vyolvepaisa.
The four most expensive words in the English language are, ” This time it’s different.” ~ Sir John Templeton
There are many techniques how a portfolio is actually created, like many of them say, invest only in two, five, or just a single stock. But we have to understand that, every person is having their own choices and preferences, and you will use your preferences for creating your own portfolio. If you feel that you can handle 10 stocks of different varieties, then go for the ten stocks in your portfolio. Warren Buffet keeps very fewer stocks and he often says to invest in fewer stocks, but ultimately that’s his preference. Still, there are many parameters and techniques on how much money is to be invested in stock in a portfolio.
So, that’s all from Vyolvepaisa for today. Stay tuned for the coming blogs, keep following Vyolve paisa and keep believing that we will evolve with vyolve.
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