Finance Done As It Should Be


What is a stock portfolio?

If you have ordered something online, you may remember the page called your orders which lists your orders history. A stock market portfolio or watchlist is a list of all the shares that you own or had bought previously. Though the implementation of a portfolio may vary between websites and depends on the platform that you may be running it on, some core features remain common to all kinds of portfolio software which are listed below:

  • The total value of your portfolio
  • The total value of your stock
  • Total profit
  • Total loss
  • Value of each stock
  • Profit made on each stock
  • Loss made on each stock
  • Percentage change in a stock’s value
  • The total shares that make up the stock
  • The current value of the stock

One can set up a portfolio with real or virtual money(on fantasy trading site). The image below is an example of a fantasy trading portfolio.

Stock Portfolio

Stock Performance Portfolio

If you sign up for an online portfolio, it will be an excellent way of learning how to trade as one doesn’t need to buy a real stock to enter it into an online portfolio. This allows beginners to understand how the stock market works and also provides a convenient way to keep track of stocks in a clear an simple manner. It is like a report card showing you mistakes that you have made in the past and therefore helps you to improve decision making.

How can a stock portfolio help?

The stock market and its potential for risk unnerves many. Nonetheless a well built portfolio, over time, has the capacity to outshine other investments. You can build a stock portfolio by yourself or with the expert advice from your broker. A general strategy is to look at long term instead of trying to make a quick buck. Because a sudden cash inflow can be countered by an equally sudden fall in stock prices and a subsequent loss. Decide on how much money you won’t need to touch for the next couple of years and put that aside for investing. The key is to decide on how much you are willing to invest and how you wish to go about. Go online, read up on a couple of investing strategies, choose your path and stick to it.

Protecting your stock portfolio

After making gains, the last thing that you want to do is give them back. Protecting your portfolio is therfore an integral part of portfolio management.  The common ways of approaching this is to buy put options or buying inverse ETFs (Exchange Traded Fund).

Put options: A put option is a contract that gives the owner the right to, but NOT the obligation to sell a specified amount of underlying security at a specific price and within a specified time period.  Say you have a Apr 07 Company 10 put. This put enables you to sell 100 shares of Company X’s shares until April 2007 at a rate of $10 per share. If the company’s share prices fall to $6 and you exercise the option, you can buy 100 of Company X’s shares at $6 in the market while selling the shares to the options writer for $10 each. Hence, you end up making a profit of 100*($10-$6) = $400 on the put option. This is not taking into account the premium that you will need to pay to obtain the put option.

Inverse ETF: An inverse exchange-traded fund is an exchange-traded fund (ETF), traded on a public stock market, which is designed to perform as the inverse of whatever index or benchmark it is designed to track. These funds work by using short selling, trading derivatives such as futures contracts, and other leveraged investment techniques.



Stocks and Shares

Although the technical definitions state that a share is a single unit of stock, the terms stock and shares are often used interchangeably.
So saying something like I own “Stocks in Company X” is equivalent to saying that  you own shares in company X.


What is a share anyway?

A company may divide its ownership into multiple pieces which are called shares. The enter unit of shares is collectively called as stock. A company can have its stock divided into shares, at the time of business formation. Subsequently additional shares may be authorized by the existing shareholders of the company. In some jurisdictions, every share has a certain declared par value. The term, par value in the world of finance refers to the face value or declared value of a product.

Why have shares at all?

Shares are a means by which company owners raise capital for their company to take up projects or do research and development. Shares ensure a cash flow and a good sum of money for the company owners.
Shares are also indicative of the ownership percentage of an in individual in the company. The one having the largest stake, ie, the maximum no. of shares in the company is usually the owner of the company. Here, it is to be kept in mind that a company may declare different types of shares each with its own privileges, distinctive ownership rules, etc. The ownership of shares is documented by the issuing of a stock certificate.


Let us assume Mr.Blue owns the company of 100 shares initially. He has all the shares. He then decides to sell some of his shares to another person Mr.White. White owns 30% of the company now as shown by the pie chart while Blue owns 70%. This means that when the company makes a profit and the dividends are handed out, he will receive only 70% of the profit while White will get the remaining percentage of profits. The question now arises why he would want to give up a substantial share of profits? This could be done for purposes of monetary gain or business expansion.

Why would I want to buy shares?

If you make a capital gain on the stock that you have bought, ie, the share prices go up, you reap the benefits of company profits. It’s a simple concept of buying at a cheaper price and selling higher. Be smart, invest after observing market trades and you will make profits.

Types of shares

Ordinary share: Carry dividends that are adjusted as per company profits and have full voting rights. These voting rights are exercised in corporate decisions. Another name for this type of share is common share/ common stock.

Preferred shares:  Carry fixed dividends that must be paid before any dividends are paid to ordinary shareholders and do not contain any voting rights.

Stock Derivatives

A stock derivative is any financial asset / instrument whose value is dependant on the price of the underlying stock. The main types of stock derivatives are futures contracts and options.

Futures Contracts: This is a standardized contract between two parties to buy or sell a specific asset of standardized quantity and quality for an agreed upon price.

Stock Options: As per Wikipedia, a stock option is a class of option. Specifically, a call option is the right (not obligation) to buy stock in the future at a fixed price and a put option is the right (not obligation) to sell stock in the future at a fixed price. Thus, the value of a stock option changes in reaction to the underlying stock of which it is a derivative.