Diversified portfolios are essential when you want to reduce the risks and volatility associated with investments due to the fluctuating markets, changing currencies, political and geographical instabilities, etc. A diversified portfolio can be defined as a portfolio that has different types of assets such as stocks, bonds, binary options, equities, forex, cash, bullion, etc. It is an investment strategy used to minimise the risks involved.
Generally speaking, there are 5 types of investments that are common in a diversified portfolio. Let’s take a brief look at each of them.
Everyone has heard of stocks, but what are they exactly? A stock is nothing more than a kind of financial security that denotes ownership in an organisation and because of this part ownership, the person has a right over the earnings and assets of the company. Stocks come in two types; preferred and common.
In a common stock, you have voting rights at shareholder meetings, whereas in preferred stock, you cannot vote, but you are liable to receive higher dividends than common shareholders. A stock is the fundamental constituent of any diversified portfolio and thus, it should never be forsaken.
A bond is a type of loan which is granted by an investor to an organisation, government body or corporation. It is also known as debt investment. The funds are borrowed at a fixed or variable rate of interest and are used by the borrowers to finance projects.
They come under the category of fixed-income security. Bonds can be traded on exchanges and OTCs (over-the-counter). They are integral part of a diversified portfolio and should be always included.
3. Binary Options
This type of investment can be a great payoff for any investor, provided they do it in the correct way. It is usually added to a diversified portfolio to spread the risk. A binary option is basically a yes or no strategy. Binary options involve stocks, currencies, commodities, etc.
It works on the principle that if you are able to predict the price of a particular option at a certain time on a given date, you will receive a fixed amount of compensation. On the contrary, if you do not, you won’t get anything.
Currency trading or forex trading is the most well-known trading methods and it forms a vital part of any diversified portfolio. Trading currencies is important for conducting businesses and trades.
The forex market is currently the largest and most liquefiable global market that overshadows the stock market as well. In any given day, more than $2700 Billion worth of forex is traded.
Nobody can deny the importance of including bullion in their diversified portfolio. Bullion refers to gold or silver bars, coins or ingots. Bullion should be a part of any portfolio as it consists of precious metals which have an intrinsic value unlike paper currency and they have a hedge against inflation. Moreover, it protects the investor during times of crises.