The Stock Market Explained Simply - Video

How To Invest In Stocks And Bonds For Beginners - Video

Stock Definition

Stock Definition

‘Companies’ and ‘Shares’ with limited liability were devised during the colonial period to mitigate high risk and uncertainty involved in the seafaring ventures. Shares enabled raising huge sums required to fund expeditions from many small investors and limited liability protected the investors from creditors accessing their personal properties in case of a failed venture. Thus a share is ownership of a company into a tiny unit or block.

With the advent of stock exchanges the shares got listed on the exchanges bringing a great amount of liquidity to shares.

Stock is a term used to describe shares in general while the word share is used in the context of a particular company. For example you own shares of NMDC Ltd. or SJVN Ltd. You also own stocks of a great number of Indian companies.

It is not uncommon, at least in India that the two terms stocks and shares are used interchangeably.

A Share of 'The Empire Jute Company Limited"

Diversity of Portfolio Definition

Diversity of Portfolio

‘Portfolio Diversity’ means spreading the investment risk by investing in a large number of stocks across various sectors. The concept of diversity stems from the popular adage “It is not advisable to keep all eggs in one basket”.  The expectoration is that in a diversified portfolio a majority will produce average results, a small number will result in loss and a few will do extremely well and the final result will be average of this varied performance. Diversified portfolio is recommended for investors who do not know investing.

 

Diversity of Stock Portfolio

Safety through diversity comes only from a really large number. Having 20 or even 50 stocks will not produce the required diversity. A portfolio of 500 stocks only will ensure adequate diversity. Since purchasing and keeping track of such a large number of stocks is impossible for an individual investor, leaving investing in an index fund, a mutual fund that tracks a diversified index like ‘S&P BSE 500’ as the only viable option.

Diversity provides safety but does not create real wealth. Master value investors like Charlie Munger prefer highly concentrated portfolios. In fact his portfolio comprises of just four stocks!

Blue Chip Stocks Slide

Blue Chip Definition

Blue Chip

According to the New York Stock Exchange, a blue chip is stock in a corporation with a national reputation for quality, reliability, and the ability to operate profitably in good times and bad.

From the investor’s perspective, a blue chip is a stock or shares in a company that in addition to having proven abilities, rewards the shareholders handsome dividends regularly, without break, issues bonus shares at regular intervals and generally protects the interests of the investors through conservative management policies like not contracting debt at all are very small debt and so on.