Hey it’s Sasha Evdakov and thanks for joining me here at Tradersfly.com. Now what I'd like to do in this week's lesson is talk to you about what is a stock trading portfolio.
What is a portfolio when it comes to your investments and how can use this concept to apply to your own personal investing or to your own personal trading?
Portfolio in your Business
In order to really hone in and understand what a portfolio is, let's take a look at a business example so we took a look at a regular business and how that business can look at its inventory as a portfolio.
For example if we start breaking the business down into a few segments, you'll start to notice that not every segment is created equally so if this business, the core focus of this business is to sell shoes that might be a large chunk of their business.
However you have other parts of that business that might sell other items, like T-shirts. You might have another segment that sells sports equipment and another large part of that business could be in the personal fitness or consultation business.
Now you have these two main parts, shoes, personal fitness and you have some T-shirts and sporting equipment and let's just say the last one they're selling maybe like water bottles or just some basic little knick-knacks, it could be sunglasses.
Now you have all these areas that create this business. So this inventory that they have or these services that they provide create this business and what you want that even though there's a large chunk of this is for shoes and another large chunk for personal fitness.
The fact is that if any one of these areas falls or collapses, you have the others to back it up. For example if the shoe sales drop, you might still get a great amount of sales from t-shirts or sporting equipment or from the sunglasses and the water bottles or even from the personal training and personal fitness area.
If the sports equipment and the t-shirts dropped and they have weak sales, you still have all the other areas to make up for those sales. So that's kind of how the portfolio works for a business is the same way that you can apply it to your own investing portfolio if you're talking about the real world.
Portfolio in your Investments
So if we take this out to the real world what happens is, is now you might have a large quadrant. I'm just going to use up box to represent this.
You might have a large quadrant of your investments, so in one quadrant what you might have is trading and this could be stocks and other things and this other quadrant you could have real estate, so this could be homes and other investments of the land in value and this could be something like cars or antique dolls or stamps.
There are a lot of other areas that you could invest in. Now you have this that represents your whole 100% of all your investments in totality.
Now if we take this a little bit further and we take this trading area and we move this to the next area right here and we break it down further, what starts to happen is again you get somewhat a diversified area.
You might have let's say one big sector of you have stocks, you can have this area that’s ETFs, from this ETFs section you might also have speculative plays and here you might have option trades or features.
So you'll have a lot of areas right now, that again start breaking things down. So it's kind of like going from the 80 to 20 and zooming in further and now what you can do is you can take this section and move it even further,
If we take this stocks area right here this is our trading section, if we take just the stocks part right here and expand it further, which you might end up getting so here's our slice which you might have is a little piece of the pie could be like Microsoft.
Then another piece of the pie could be Tesla then you have maybe another part of the pie such as Verizon or something else. So you have all that now split up into these stock areas.
This is really what a portfolio does is that if anything happens, let's say to Verizon or Microsoft then the others help you out or if anything happens to stocks you actually might make it up in ETFs or you might make it up in options you know or even your speculative place.
It's about Diversifying your Portfolio
Maybe part of this portfolio could be like materials like gold, so they make that up and it helps you kind of cushion and balance things out. So if you're looking at the whole portfolio in general, trading is just a small part of that and really that's all about diversifying and limiting your risk.
That's why you spread this out similar to what business does when it talks about shoes and it sells shoes primarily but if something goes wrong and happens, you still have t-shirt sales, you still have sports equipment, sunglasses, water bottles, personal fitness lessons and classes that you do.
The same thing goes in trading your whole investment portfolio might be with cars, real estate and trading and then if you take trading further, now you get into part of that portfolio could be gold, options, speculative pays, ETFs, stocks and if you break any one of those down then you can get into stocks specific areas.
It's really about lowering your risk and minimizing if anything happens major or catastrophic to your one section, the other parts are there to hold you up.
Now you should know what a portfolio is and how you can use it to kind of diversify and benefit your overall investing strategies.
Thanks for sticking with me. Remember to do what you love, contribute to others, but most importantly live life abundantly.
I'll see you in the next lesson!