How to Invest in Stock
When You come to the Bank to put money on Deposit, You look at the yield, which established the Bank and which You will receive in the future. You are not interested in what percentage received the people who brought the money in the Bank a year ago. And it is absolutely common and the correct approach to placing money on Deposit.
How to Invest in Stock When it comes to buying shares, it seems people think that the information on the amount yielded the possession of one or another share of those who bought her a year (month, week, day) ago, will have an impact on the amount of money they bring possession of this action. On a similar idea is based technical analysis, the main postulate of which - all the information about future prices is contained in the chart that reflects the past price changes.
However, to the purchase of shares can be approached the same way as a Bank Deposit - buy those shares, which have a high yield. But on the stocks is not written their future profitability, so we call this indicator «the potential profitability». The name reflects the probabilistic nature of receiving profit.
How to Invest in Stock Calculation of the potential profitability of the shares
How to find the potential yield from the investment in shares? The calculation is very simple - there is a current price, there is a period of time (for example, a year) and is the future value (in a year). The difference between the future and the current price and represents a potential result for the period. The most difficult and time-consuming process is to make a forecast of future stock price. We expect the future prices on the basis of the fundamental indicators of business activity (profit, earnings, book value).
After the made all the calculations, we obtain the potential yield of all shares and can sort the list based on the size of the potential profitability of each of the shares. We have a kind of «hit parade» of the shares.
How to Invest in Stock How to manage a portfolio of stocks, using hit-parade?
When managing a portfolio we have set ourselves a task to ensure maximum potential yield of a portfolio at a given client level of risk.
If the client has clearly established its investment priorities, then with the transfer of funds in control he is the investment Declaration, which sets a certain level of risk of the portfolio. If the investor is not the individual requirements of the investment Declaration, that he can «join» to the portfolio of the investment Fund, in which there is a total for all investors Declaration (the regulation of the managing trader).
In the investment Declaration shall be established requirements and restrictions on the composition and structure of the portfolio. In particular, it allows you to set the ratio between shares and bonds in the portfolio, limits for each group of securities, limits on one Issuer in each group.
In the investment Declaration, which we use for example, set a limit on the proportion of shares in the portfolio of 50%. This means that when the stock market is growing, and the proportion of shares in the portfolio increases, the observance of the selected ratio of stocks and bonds leads to the need to sell a small part of the shares. The reduction of market shares, on the contrary, increases the share of bonds. Then sale of the bonds and the shares are purchased. It is, as a rule, allows you to sell some of the shares at higher prices, and buy at lower. At the same time strictly observed measure of risk installed the client in the investment Declaration.
Note that the sale is not the whole package of these shares, and only adjusted their share in the portfolio. A certain share fully sold from the portfolio only in the case if in the hit-parade are there other, potentially more profitable.
Legendary investor Warren Buffett said: «the best time for the sale of the shares to " never». You can develop this thought: «the best time for the sale of the shares when found other, potentially more profitable». We use this approach.
Conclusion:
When managing a portfolio of shares necessary to monitor changes in the hit parade, sell shares, which went from the leading positions, and buy new leaders. That is, keep in the portfolio set of shares with a maximum potential returns and comply with the diversification, which is installed the investment Declaration. In this approach, the main objective when managing a portfolio - selection of stocks, which are growing faster than others, and reduced slowly. While respecting the important rule - you always own the shares.
