8. What is a Portfolio and it's importance.

Before we proceed to creating a broker account or a TMS account lets learn a little about what is a portfolio? A portfolio is simply a collection of stocks, bonds, mutual funds and even cash. The shares of different companies we purchase forms our portfolio. Suppose we invest in the IPO of Reliance and we got allotted 10 shares. So now we have in our portfolio 10 shares of Reliance Insurance. Our portfolio is of 1000 rupees now(10*100). So if we also get allotted the shares of Liberty Energy then we have another 10 shares and our portfolio value will be 1000+1000=2000 rupees for now. Once the shares are traded in secondary market the value of our portfolio will change daily with the change is price.

 Why is Portfolio Important?

We must have heard a saying "Don't put all your eggs in one basket" . Just like that saying suggests we should not invest in one particular shares or one particular sector only. The main reason I am talking about portfolio is because, when we invest in share market we need to be careful how our portfolio looks. We should diversify our portfolio to minimize the risk. For example, before the Covid crisis if we had bought only shares of hotel then we would have faced a heavy loss because the price of shares of hotels declined sharply. So if we had at the same time the shares of Insurance then that loss could have been recovered since shares of Insurance Companies grew in the meantime. So we should not invest in one particular sector only.  As per my view, I think we should diversify the portfolio into 2 groups. 1st group will consist of shares which provide high return due to change in price( like microfinance) and 2nd group we will buy shares which provide high return in terms of dividend and which are held for a longer period.  How we design our portfolio depends upon how much risk we are willing to take. It also depends upon the fact whether we are an Investor or a Trader which is my topic for the next blog. 

So to put in simply we should select shares very carefully and try not to be too dependent in one shares or one sector only as the risk could be very significant.