Investors construct market portfolios based on the financial capital they have at their disposal and according to their own specific investment needs and goals. Many investors choose to build their portfolios through stocks, which tend to perform well in strong economic times and have serious growth potential. Other investors build market portfolios full of fixed income instruments such as bonds, which are generally more stable than stocks and can provide steady income over a long period of time. Portfolios which combine many different types of assets are also very common, since these portfolios contain the diversification that can help to ward off risk.
Just about every investor who decides to put his money into some sort of investment security has a particular goal for that money. There are many different strategies by which investors can go about reaching those disparate goals. Investors generally try to build market portfolios through a variety of securities, which can go beyond stocks and bonds into more complicated instruments like mutual funds or derivatives and can also include real estate, commodities, and much more.
Many investors trust the stock market as the way to build their market portfolios. When an investor buys stock from a company, he is essentially gaining a small piece of ownership in that company, which is known as equity. That equity can grow in value over time if the fortunes of the company increase. A portfolio full of stocks can provide the most growth potential for investment capital, but investors also must realize that the volatility of the stock market means that stocks are risky investments.
To avoid these risks, investors can build market portfolios full of safer financial instruments. Bonds are known as fixed income investments because the person who buys a bond is promised regular income in the form of interest payments from the institution issuing the bond, as well as eventual repayment of the principal. The safety of bonds depends on the institution issuing them. For example, government bonds are generally safe although they pay low interest rates, while corporate bonds pay higher interest to compensate investors for higher risk levels.
There are many other types of investments that can fill various market portfolios. Commodities such as gold and silver can provide a good balance to portfolios filled with stocks and bonds, while mutual funds offer great portfolio diversification at a reasonable price. By combining different elements of all of these assets, investors can build portfolios that minimize risk. It is rare for all aspects of the market to be performing poorly at once, so investors with great diversity can usually count on some aspects of their portfolios to be performing well at any given time.