How to Build a Stock Portfolio

It’s the question on most investors’ lips. How best to build a strong stock portfolio? Here, we provide a host of relevant information.

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There are many different types of stocks out there, which can make building a stock portfolio tricky. As a new investor — or even a seasoned investor — you may find this confusing.

Don’t worry, this article has got you covered. Here’s how to build a stock portfolio.

What is a stock portfolio?

A stock portfolio is a form of investment portfolio. It is a collection of individual stocks that you choose to buy on the stock market with the aim of making a profit.

In general, it’s a good idea to buy a range of different stocks to create a diversified portfolio that includes various different sectors. This will hopefully help you become a more resilient investor by being less reliant on just one sector or one type of stock.

In a stock portfolio, you will buy each individual stock as opposed to a fund, where a portfolio manager or investment manager will make those decisions for you.

You can hold your stock portfolio in any investment account that suits your needs.

How many stocks do you need to diversify a portfolio?

There’s no set number of stocks that is needed to make a diversified portfolio. The exact amount will vary depending on your risk appetite, your goals, and the sectors you want to invest in.

However, you should have more than two or three. You need to be able to cover a range of sectors and geographies in your stock portfolio for it to be truly diversified. 

The average portfolio holds between 20 and 30 stocks. We typically suggest owning 25 or more to fully diversify your portfolio.

It will also depend on the overall size of your investment portfolio. If you are just getting started with investing and have a few thousand pounds or less, then owning fewer companies probably makes more sense. You can always add further positions in future.

How to build a stock portfolio

There is no one correct way to build a stock portfolio, as it largely depends on your personal financial situation and goals. But here are some steps to take to start building your investment portfolio.

1. Define your investment goals

It’s a good idea to establish what your investment goal is before you start building a portfolio. This will help you clearly define your risk appetite, your investing timeline, and the research necessary for success.

2. Choose the types of stocks to invest in

Here are the main types of stocks you’ll find on the stock market:

  • Common stock
  • Preferred stock
  • Large-cap stocks
  • Mid-cap stocks
  • Small-cap stocks
  • Growth stocks
  • Value stocks
  • IPO stocks
  • Dividend stocks
  • Non-dividend stocks
  • Cyclical stocks 
  • Non-cyclical stocks
  • Income stocks
  • Domestic stocks
  • International stocks
  • ESG stocks
  • Penny stocks

A diversified portfolio will include a range of these types of stocks. It doesn’t need to include every single one, though. Choose a few types of stocks that appeal to you and fit your goals and investment strategy. Then start researching different companies that fit these categories. 

3. Research companies you want to invest in

It’s important to do a significant amount of research before making any investment decision. And it’s usually a good idea to select a few different stocks from each category — ideally from different sectors to help you maintain a diversified portfolio.

A good strategy is to stick to companies you know. If you’re interested in fitness, take a look at fitness companies that could be good investments. Sticking with what you know and are already interested in helps you to understand the companies, business models, and decisions easier than with a company or industry you don’t have any interest or knowledge in. 

You could compare a good stock portfolio to a top-performing football team. You need a healthy mix of attackers, playmakers, defenders, and a goalkeeper in order to give the team the right sort of balance. If you’re weak in or over-dependent on one area, the team might struggle.

A strong stock portfolio operates in a similar fashion. Some players might work well together while others won’t gel at all. But you might not find that out until they’ve played a few games. You might want to make some changes and some players will inevitably get injured because of factors beyond your control.

The idea is that the total return of your investment portfolio will remain strong regardless of the performance of any individual stock. 

Can I borrow against my stock portfolio?

In some cases, you will be able to borrow against your stock portfolio.

Most brokerage firms allow customers to borrow up to 50% of the value of marginable securities. So, if you have $4,000 of marginable investments in your margin account, you can borrow up to $2,000.

A Lombard Loan is a type of credit, offered in the form of a fixed loan or agreed overdraft granted against a pledge of liquid assets such as equities, bonds, or investment funds, up to a certain percentage of their value.

Like any loan, a Lombard Loan comes with risks and is a serious financial commitment. It should not be taken lightly and you should seriously consider the implications before you borrow against your stock portfolio.

It may also be worth speaking to a financial advisor or investment manager before making this decision. They will be able to guide you through the process and talk you through all the potential implications of borrowing against your stock portfolio. 

How much of your portfolio should be in stocks?

A fully diversified investment portfolio will not include just stocks. 

It’s important to invest in other asset classes. This could include bonds, property, private equity, and even alternative investments like art, wine, and other luxury items.

The asset allocation for your investment portfolio will be unique to you. The exact percentage of each asset class will vary depending on your own preferences, needs, and goals. 

It will also depend on your interests. Again, if you know nothing about art, it is probably not a good idea to start trying to invest in it. Unless, of course, you’re prepared to put in a significant amount of work researching and learning.

What is a good return on a share portfolio?

A good return will vary year to year. The macroeconomic environment impacts the performance of stock markets hugely. Some years, regardless of how well constructed your share portfolio is, you may still make a loss.

Stock markets go down as well as up. The aim is that over the long term, you will make a good return. 

Despite this yearly variance, there are some general rules that determine good or bad performance. 

On average, investors tend to aim for a return of 10% or more per year. This return tends to mean you are not only beating inflation and therefore maintaining your wealth, but actively growing your wealth simply by staying invested. 

How often should you check your stock portfolio?

When you’ve created a portfolio yourself and invested significant amounts of your money in it, you may well be tempted to check on it continually.

Try to avoid this. It will not help you to check your portfolio daily or even weekly. If you check your stock portfolio too often, you run the risk of reacting to every market movement and making too many changes that end up proving costly. 

Instead, for most people, checking your stock portfolio every couple of months should be sufficient. 

This is often enough to make sure your portfolio remains balanced and to make necessary adjustments if one stock is consistently underperforming, for example. 

However, checking your stock portfolio every couple of months is infrequent enough to prevent you from reacting to every market movement and making emotional decisions that could harm the financial performance of your portfolio in the long run.

What stocks should I put in my portfolio?

The exact stocks you should put in your portfolio will depend on a multitude of factors. 

Your ability to tolerate risk, your liquidity needs, and your medium- to long-term financial goals will all influence which stocks you should hold in your portfolio.

The most important thing to remember is that you should always do your own research and make sure you fully understand any stock you invest in. Don’t just buy something because someone online said it was a good idea!

Additionally, you should make sure your investments match your risk appetite. 

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.  

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a "top share" is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a "top share" by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.