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Embarking on the journey of online trading can be both exciting and daunting for beginners. Building and managing an online trading portfolio is a key aspect of this financial venture, offering opportunities for wealth creation but requiring a solid understanding of market dynamics and investment strategies. In this blog, we will walk you through and guide you on how you can build an investment portfolio for yourself. Let’s divide this process into three main sections; first, we cover the formalities, then learn about the prerequisites of investing, and, financially we look at portfolio construction.
Table of Contents
Part 1: Demat Account Opening
If you are a complete beginner looking to invest, you need to know three things:
- Investing in the stock market does not guarantee returns
- Investing is not easy
- Having a Demat account and a trading account is compulsory
To start investing in the stock market today, you will require a Demat account and trading account. Online stock trading is the norm today, and having these two accounts is essential for online stock trading. Your trading account allows you to seamlessly buy and sell stocks and your Demat account stores the shares and secures them until you decide to sell your shares.
You can open a Demat account and a trading account with a DP (depository participant), who is a licensed stockbroker, like Share India. Share India provides plenty of additional features on top of your essential core Demat and trading account features. The procedure to open the accounts is easy. All you need to do is to visit the broker’s official website or download their app, and follow the account opening guidelines.
Part 2: Things to Do Before Investing
After getting hold of your Demat and trading accounts, don’t rush to place a buy order through your stock trading app; there is still time for that. As mentioned above, you need to know three things before you start investing. Having covered Demat and trading accounts, let’s focus on the other two.
Investing is not easy and doesn’t guarantee profits. So, before you start buying stocks, you must do a few things.
- First, understand how the stock market behaves over the long term, and find out what a reasonable expectation is regarding stock market returns. At the same time, learn about how volatility brings about investing risks.
- Based on this you will be able to evaluate your investor profile and risk tolerance; then you will be able to find the optimum investing strategy. Since investors’ profiles vary, you cannot simply copy the investing strategy of your favourite investor. What suits their investor profile may not work for you.
- You also work towards learning fundamental analysis and interpreting at least the most basic components of financial statements. Knowing how to fundamentally analyse stocks will help you pick the right stocks and keep you on the right path.
Part 3: Portfolio Construction
Upon completion of section two, implementing the outlined steps will enable you to construct an investment portfolio tailored to your profile. Your stock investment portfolio encompasses all stocks held in your Demat account. Building a stock trading portfolio involves a concentration on three key elements: establishing your investing framework, implementing diversification strategies, and determining optimal asset allocation.
Investing Framework
When you understand your risk tolerance and possess the knowledge to fundamentally analyse stocks, you can decide on a strategy to pick stocks to achieve your investment goals. For example, assume you are a risk-averse investor who plans on investing with an investment horizon of more than ten years. So, you look at blue-chip companies that generate stable profits and exhibit a lower degree of volatility. Due to this framework, you avoid investing in cyclicals like commodities, wherein a ten-year holding period doesn’t make much sense. This example was simplified. In reality, an investing framework should be more nuanced. To fit in your stock selection framework, the stock may have to satisfy several growth parameters, valuation parameters, etc.
Diversification
After establishing an investment framework and selecting stocks aligned with your goals, there’s no assurance that every pick will be profitable; some may not meet expectations or even incur losses, which is normal. Hence, diversification becomes a valuable strategy to mitigate risks. This involves investing in multiple stocks across various sectors. For instance, if you’re bullish on banking, instead of concentrating solely on one banking stock, diversify by investing in several banking stocks and allocate funds to other sectors you’re optimistic about. However, it’s essential to avoid over-diversification, as managing too many stocks can become tedious.
Asset Allocation
Suppose you have ₹1 lakh, and you aim to create a diversified portfolio of 20 stocks. However, this doesn’t imply investing ₹5,000 in each stock. As an informed investor, your level of conviction varies among the 20 stocks, leading you to allocate more funds to stocks with higher conviction and expected returns. For risk-averse investors, limiting risky bets to a smaller portion of the portfolio may be preferred. It’s important to note that, in reality, you don’t purchase all 20 stocks at once; instead, you gradually build your online trading portfolio over time.
Conclusion
Embarking on online trading can be a rewarding venture for beginners, but it requires careful navigation. Creating an online trading account involves a step-by-step process. Initially, grasp the risks associated with stock market investments. Next, assess your investor profile, formulate an investing framework, and proceed to open both your Demat and trading accounts. Subsequently, commence constructing your online trading portfolio by investing in stocks aligning with your investment framework. Simultaneously, focus on diversifying your portfolio to reduce risk and allocate capital thoughtfully. By following these steps and staying informed, beginners can confidently embark on their online trading journey, navigating the complexities of the financial markets with the goal of building a resilient and successful portfolio.