What is a Portfolio Investment?

Malcolm Tatum

Portfolio investment is a strategy that calls for securing an investment but not being actively involved in the management of the business that issues the stocks or bonds involved in the purchase. This is in contrast to direct investors, who are involved to some degree in the ongoing business operation. Many investors choose to focus mainly on portfolio investment opportunities, content to see the results of the management efforts without actually contributing to them. This approach is often used when it comes to securing foreign investments, but is equally practical when it comes to acquiring domestic investments.

Many investors choose to focus on portfolio investment opportunities.
Many investors choose to focus on portfolio investment opportunities.

With a portfolio investment, the goal of the investor is simply to earn returns without the need to be involved in the life of the company issuing the shares or bonds. This passive approach allows investors to focus on other matters that are unconnected with the investments. As long as the returns are considered equitable by the investor, there is a good chance he or she will simply hold onto the investment, maintaining it in the portfolio and enjoying the stream of dividend payments resulting from the ownership. At some point, the investor may choose to purchase more shares if the investment is performing well, or decide to sell the shares currently held if there is reason to believe they will shortly begin to decrease in value.

The use of a portfolio investment strategy makes it possible for the investor to be concerned with how well the investment is doing rather than devoting time and energy to the tasks of growing the investment. Since the focus is on earning returns, an investor using this approach will be more concerned with what is happening with the shares in the marketplace, and deciding how to respond to those events. Here, the investor does not have to be involved in company politics, market planning, or other factors that direct investors must deal with on an ongoing basis.

It is important to note that a portfolio investment does not necessarily mean the investor holds only a small percentage of the shares traded on the open market. In fact, it is possible to hold a significant number of shares and still not be involved in the operation of the company that issues those shares. While the investor may be called upon from time to time to vote at investor meetings or perform some duty such as participating in the vote on filling a vacancy on the board of directors, he or she will not be interested in actually serving on the board or participating in any other activity that is connected with the day to day business operation.

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