An investment portfolio is an account opened for a client with a company licensed to manage investment portfolios. It includes cash, securities, or other assets owned by the client. The investment portfolio is either a portfolio or managed by the portfolio manager or by the client.
And the multiplicity of types of investment portfolios as a result of the variation in its components, desired objectives, and the degree of risks associated with it, among the most important types of investment portfolios managed by the person authorized to manage investment portfolios are regular return – income portfolios, profit – growth portfolios, mixed profit and return portfolios, conservative portfolios, and portfolios with a high degree of risk.
In this article, we will explain what are the components of the financial portfolio and the mechanism of its formation in accordance with what was stated in the executive regulations of the law establishing the Capital Markets Authority and regulating securities activity.
The investment portfolio consists mainly of a group of securities, in addition to the client’s cash allocated to the investment process. The components of the investment portfolio are characterized by movement and change according to its type and objectives for each client, and the degree of acceptance of risks, as the composition and class of securities, especially stocks, bonds, instruments, units in a collective investment system, and other tools differ from one portfolio to another, in addition to the securities that make up the investment portfolio vary in terms of type, value, return, and maturity periods.
The formation of the investment portfolio is governed by several important controls and factors, represented in the available capital, the expected return, the risks associated with the securities that make up the investment portfolio, and diversification, which are the controls and factors that those wishing to form an investment portfolio must take into consideration, in order to achieve the desired goal of Investment, and here are some of the controls to be taken into account when forming an investment portfolio:
- Financial or capital controls:
It is necessary for the authorized person to determine the financial status of the client, as it is advisable to take into account the reliance on the funds available in the portfolio in financing his financial portfolio, and these funds can be the result of the facilities and loans obtained by the client, whether the components of the portfolio guarantee it or not.
- Diversification controls:
In the case of an investment portfolio managed by an authorized person, when selecting securities, it is necessary to follow the principle of diversification, in accordance with one or more of the following controls:
- Diversification among the issuers of securities.
- Diversification in the type of security (e.g preferred shares/common shares, sukuk, corporate/government bonds, variable interest/fixed interest bonds, units in a collective investment system).
- Diversification in the degree of risks associated with each security.
- Diversification between sectors of economic activity.
- Diversification according to maturity periods.
- Diversification according to the return achieved from the securities.
- Diversification between listed and unlisted securities.
- Diversification between the following markets:
– Spot or cash markets, futures markets, and financial derivatives markets.
– Domestic and foreign markets.
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