Stock Portfolio – Index
The shares index indicates the average performance for a theoretical portfolio of shares. They are used as a scale for measuring the markets behavior. There are many indexes, such as Ibovespa, which comprises an ideal portfolio with Bovespa’s most traded shares, and such as Small Caps, a theoretical portfolio of médium sized companies listed at Bovespa, besides others indexes.
According to the modern portfolio theory, diversification is used as a way of optimizing portfolios, mitigating risks. Basically, there are two risks involved:
Non-Diversifying Risks: the risk that equally affects all companies and assets, not particular targets, but something that affects everyone, like inflation rates, crisis, wars, etc.
Diversifying Risks: risks tied to particular assets or shares which influence slightly or strongly the portfolio of shares. Those risks can envolve just a company or entire sectors.
To reduce the exposure of a portfolio, the only you need to do is adding more assets on it. This way, if one share or another goes down, it isn’t enough to distress the portfolio as a whole. However, a regular investor could hardly deal with such a number of different shares, either for a lack of cash or difficulties to deal with a large number of assets, or even because brokerage costs and taxes. For such operation to become feasible, indexes have been created. When dealing with an index, things happens as though the investor bought all of those shares tracked by the index, but at a much lower costs and instantaneously.
Many investor chase ways of ‘beat’ the markets, or making profits higher than the indexes. However, that’s not an easy task, and just a few get there. If a common investor just wants to follow the markets, he can purchase a theoretical portfolio tied to the index, and this way he can track all shares included there. This theoretical portfolio in Brazil is Ibovespa. However, it is possible to negotiate several indexes, each of which has different goals, with different shares, just by the investor to choose what they want to negotiate.