Chapter: 1 Financial Markets, Instruments and Investment Basics

Section: 7 The Investment Process

An investor’s portfolio is simply a collection of investment assets. For example, an investor’s portfolio might comprise of a collection of stocks, bonds, mutual fund shares, commodities and some real estate. Once the portfolio is established, it is updated or “re-balanced” by selling existing securities and using the proceeds to buy new securities, or by selling/buying securities to decrease/increase the size of the portfolio. As mentioned, investment assets can be categorized into broad asset classes, such as stocks, bonds, real estate, commodities, and so on. The investment process can broadly be divided into the following three steps:


Asset Allocation: Allocation of an investment portfolio across broad asset classes such as stocks, bonds shares of mutual funds, real estate, etc.


Security Selection: Choice of specific securities within each asset class.


Trade Execution: Actual purchase (or sale at some later stage) of the security through a broker or dealer.


The steps will be discussed in greater detail in later chapters.