What is stock- common stocks- ownership

What is stock- common stocks- ownership

Stock is one way of ownership of a particular company. In this way, you can own a small or big owner. If you have one share of Google, you are the owner, a small owner of google. The owner can have a claim on the company’s assets and earnings.

Publicly traded stocks:

Publicly traded stocks are sold on markets like the New York stock exchange or NASDAQ. Like these markets, stocks are traded, and you can buy and sell them here. 

You have voting rights because you are an owner. But you are not involved in the company’s day-to-day operational decisions.

Stocks in a diversified portfolio

There are your whole basket of all your holdings as far as your

investments. Stocks are riskier, and so the more stocks you have in your overall basket of investments, your portfolio, the more your overall portfolio will go up and down; mainly, the down part is how you react when it goes down. Stocks are more for the long run and are riskier, and understand how that relates to your risk tolerance.

Importance of Diversification

Imagine, just before the covid19 pandemic, you invested money in tourism stocks. Due to covid19 outbreak, tourism industry has lost billions of dollars and you would have lost so much money if you had invested in a particular sector. 

 

On the other hand, if you had invested in technology and finance along with tourism stocks, your portfolio would be in profit. 

 

Diversification eliminates a lot of risk. That’s the reason, your portfolio should be diversified. 

 

There is also a quote on diversification by Warren Buffett: Do not put all eggs in a single basket. That means, you should not invest your money in one asset class, one industry and one stock.

How to build a portfolio- vanguard portfolio allocation model

https://investor.vanguard.com/investor-resources-education/education/model-portfolio-allocation

 

Vanguard shows you if it looks at some average annual returns. It’s going to show the best year, the worst year and the number of years with a loss and you get a feel for how much you know these different worst cases in there. They’ll get an idea of various risks than things as you go through here, but you can look at stocks and bonds and unlike the green would be like some short term cash or things like that looking over a long period of time.

Measuring risk

It is extremely important to learn what you should avoid doing in the stock market investing. If you learn this, your chances of losing money will decrease significantly. 

 

Don’t try to gamble in the stock market, you may lose money quickly.

Don’t buy penny stocks to gain more profit. You may end up losing all money. 

Invest only for the long term (for at least 1 year)

Learn stock market trading before buy and sell stocks

Use different types of orders for risk management 

Avoid buying stocks if you are not comfortable with market volatility. Choose index funds for less volatility. 

Risk is a chance that your stock might go down in price, and we could lose money and reduce our profits. 

The Alternative side of the coin of risk is the reward. When there is a risk, there is a reward. 

Suppose you are willing to get more risk than you would be getting reward. If you reduce the risk, your reward will also go down. 

But the question is can we measure the risk? 

If we can measure the risk, we can feel volatility. Volatility is the degree to which a stock price moves up or down. The stock whose price moves vary widely and is not very predictable is considered highly volatile. The stocks which maintain a relatively stable price have low volatility. 

So, yes, we can measure risk in many ways.

The measured risk with a personal view of risk

Measured risk is paired with one’s feelings about risk. This is very important for an investor. Sometimes measured risk is low but feeling about that particular risk is high, so combine them both before taking any decision.

Standard deviation

Standard deviation measures the dispersion or variety, or variability of data from its expected value. It shows how much the current return is deviating from its expected historic normal returns. A stock that has higher standard deviation experiences higher volatility so higher risk is associated with that stock. The greater the standard deviation and the greater the possible outcome, more volatility.

Sharpe ratio

Sharpe ratio is a way to look at a portfolio’s past performance or future expected performance. It shows the excess risk an investor has taken by investing in a specific portfolio. A sharpe ratio above 1.00 is considered good because you are getting returns relative to its volatility. Following is the formula to calculate sharpe ratio:

SHARPE RATIO VARIATIONS

SORTINO RATIO:

It differs from the Sharpe ratio in that it only considers a standard deviation of the downside risk, rather than that of the entire (upside+downside) risk. Here is how to calculate sortino ratio:

TREYNOR RATIO

It measures how successful investment isin providing compensation to investors for taking on investment risk. The treynor ratio is based on the portfolio’s beta that is sensitivity of the portfolio’s returns to movement in the market. It will help us judge the risk. The formula for the Treynor ratio is:

Beta

Beta is the most common measure of risk or volatility, and we can use it for mutual funds, exchange-traded funds, or individual securities. 

If individual stock is less volatile than the market, then Beta would be between 0 and 1.0; if beta equals one, then it represents the volatility of the index of the overall market. If beta is more significant than one, then this donates volatility that is greater than the broader index. A negative beta means the stock is moving in the opposite direction of the index.

Alpha

Alpha goes hand in hand with beta. It is more of a performance measure. Alpha refers to excess returns earned on investment above benchmark or index return.

R- Squared

R squared is a statistical measure representing the percentage of a mutual fund portfolio or a security’s movement that can be explained by or attributed to movement in the benchmark index.