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How to get maximum return from your portfolio?

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Your portfolio is like a garden, which you have to maintain on daily or weekly basis. If you don’t take care of your garden, you will find it a place with dry grass, unwanted plants and a house for bugs. Your portfolio is also vulnerable to bugs, these bugs are not any insects but these are the market bugs like loss.

The idea behind writing this article is to give the answer of the question:

How to get maximum return from your portfolio?

There are several methods given by experts to maintain one’s portfolio to generate more profits. This article does not deal with these methods, so if you are hoping for any specific method, it’s time to shift to another source.

The main purpose of this article is to discuss some basic things which can be applied in managing and maintaining portfolio and thus increasing one’s chances of getting higher profit.

Quick readings:

Allocate your total investment amount in various securities like stocks, derivatives, currency, commodity etc.

Disperse your fund (which you have decided to invest in a particular security) into different industries.

Purchase securities of different companies in a particular industry.

The very basic thing one needs to do for increasing his chances of getting higher return is to allocate his/ her funds to different types of securities like stocks, derivatives, commodity etc. This is the most important task for hedging risk.

Let’s suppose If John has only one type of security in his portfolio, chances are that his portfolio would not survive in adverse market situations. But on the other hand if he possesses different types of security in his portfolio, his chances of surviving in adverse market conditions will be higher.

Reasons, why price of a security falls down?

Stock prices can go down by as many reasons as you can think. Some of them are, due to:

Global crisis
Natural/ man – made disaster
Change in government policies etc.

So, if you want to hedge these types of risk and want to earn profit, the best solution is, diverse your investment in various securities.

Secondly, just allocation of investment in different securities is not sufficient in itself for balancing risk. That is why an investor needs to spread his/ her investment in securities which belong to different industry also.

Like if John has decided to invest 30% of his total investment in stocks. It’s good for him, to spread this amount among various industries’ stocks.

Finally, it is suggested to investors, that they need to further disperse their investment amount in different organisation’s securities and do not take the risk of investing in only one or two company’s securities.

Investment in different securities has its own merits like if one company’s stock is not going up; it won’t affect the portfolio as much as it could (in case of one has purchased a large no. of shares of that company).

Investment in different securities also leads to increase in the value of overall portfolio. It is because if one security or company is not performing well, the other will.

Why should we follow these above steps?

You can better understand the value of these steps by reading this hypothetical story:

Once, a friend of John suggests him to invest some money in share market. After discussing with his other friends and family members, John decides to invest in share market for the purpose of increasing his investment for his new business plan. He gets his demat account opened through a stock broker and starts trading in share market. After some time, John finds XYZ Ltd company’s stock very lucrative as he gained a profit equal to 5% of his total investment from that company’s stock, in just 2 days. He decides to purchase a larger no. of shares this time and now he has only one type of security in his portfolio i.e. shares of XYZ Ltd. John has been earning steady profit in share market as the share price of that company were rising day by day. It was a good time for him as he discarded the very basic principle of investing- “Don’t put all of your eggs in one basket”, and still earning money. Now what happens, one day XYZ Ltd has to face labour strike and as a result it’s production halts for some time. The company suffers a huge loss and investors start pulling their money out, from that company.

John also tries to pull his money back but due to high supply of shares, the stock breached its lower circuit and stopped trading for that day. The very next day John just waits for the time when market gets opened. As his waiting time overs, the stock opens directly at lower circuit and John has to wait for the next day. This happens for 4 to 5 days and in the meantime John sinks all of his earned profit as the share price falls down by 20 – 25 per cent.

John regrets a lot and then decided not to repeat this mistake again.

Personal view:

I personally have seen people who had been earning profit for last few months and lost all of their profit plus a large portion of their investment in a single lot, just like John. It happens all the times. The common thing among all of them was, they were targeting very few companies as their investment option.

Disclaimer: MonetarySection.com will not be any way responsible for trading losses incurred using any of the techniques/ methods mentioned on this website

Definition of stock split

Stock split is a technique used to infuse liquidity and make share’s prices more affordable for investors. A company, whose share’s prices are beyond the reach of average investors, splits its shares by increasing the total number of outstanding shares. Usually, the shares are increased in the multiples like 2 or 3 for 1, which means that the shareholder will have two or three shares for every share held by him earlier.

It should be kept in mind that, only the number of shares is increased and not the total market capitalization of the company. So, stock split results in the decrease in share’s price and thus they become more affordable for investors.

Example of stock split:

XYZ Ltd has total 100,000 outstanding shares, each valued at INR 5,000. So the total market capitalization of the company is 500,000,000. Let’s suppose that the company splits its shares into 2 for 1.

Now,

The total no. of shares is = 100,000 × 2 = 200,000
But the total market capitalization of the company is = 500,000,000.
So, the share price will be = 500,000,000/200,000 = 2500.

Definition of index divisor

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An index divisor is a mathematical number, used in the calculation of a stock index like Sensex & Nifty. This number is calculated by dividing the base year’s index value by base period’s market capitalization of the concerned stock market.

Every stock market’s index (like Nifty) is calculated by making a comparison between current market capitalization of the constituents of an index and base year’s market capitalization of the constituents of that index. This divisor is the only link between original base period value and the current stock market index’s value.

As the base year for a stock market remains unchanged, the value of index divisor also remains the same.

Example:

For the calculation of Sensex, base year is 1978 – 1979 and base index (value of Sensex at that point of time) is 100. Let’s suppose at that point of time, market capitalization of the constituents of Sensex was 60,000 then, the

Index divisor is:

Definition of free float market capitalization

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Free float market capitalization is a term used in stock market. The term refers to that proportion of total shares which are actually available for trading in stock market. It means that out of total issued shares, if promoters’ holdings, government holdings and other locked in shares are excluded then remaining shares represent free float market capitalization.

So if put it simply free float market capitalization is the proportion of total shares available for trading to the general public.

Example:

Let’s suppose that company XYZ Limited has issued 1, 00,000 shares of INR 10 each. Out of which 10,000 shares are held by promoters and 5,000 shares are held by the government.

Now,

Total market capitalization of the company is = INR 10, 00,000 (1, 00,000 × 10)

Total locked in market capitalization is = INR 1, 50,000 (15,000 × 10)

Free float market capitalization is =

Debt instrument – Definition and types

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Definition:

Debt instrument is a document by which an issuing party raises funds and promises to repay the same as per the terms of the contract. A debt instrument is basically a medium of raising ‘borrower’s capital’ by a company.

It serves as an enforceable document for the lender of the fund in case of any dispute between lender and borrower.

These instruments are mainly used to generate some income by investors. The borrower (issuer) has to pay some kind of interest on these instruments which becomes the yield for investors.

Types of debt instruments:

Debt instruments normally include all types of loan fund raised by a company. Some of them are:

Debenture: A debenture is a document that either creates a debt or acknowledges it.

Bond: Bonds are instruments of indebtedness of the issuer to the holder. These are long term source of raising funds by a company. A fixed rate of interest called coupon is paid on these instruments.

Mortgage: A legal agreement between two parties wherein one party owns some debt from the other party in exchange of title of some property. The lender of money is known as mortgagee and borrower of money is known as mortgagor.

Lease: An agreement by which owner of a property (lessor) grants permission to other party (lessee) to use his/her property for a specific time period. The permission is grant only when the lessee agrees to pay some rent to the owner of that property.

Certificate of deposits: A certificate of deposit (CD) entitles its bearer to receive interest on the amount deposited by the bearer.