What is stock diversification?

shares diversification is an investment term used to describe the practice of buying shares in different assets than all capital in only one investment. The purpose of diversification of shares is to alleviate any loss that could increase if something happens to any investment. Such a scenario will be easier to withstand if there are other assets that would help the investor absorb the shock of losses suffered in one of the investments.

For example, an investor with $ 20,000 could decide to buy some stocks in companies as an investment expected to bring dividends. The investor could decide to invest in ABC and DEF by purchasing shares worth $ 10,000 in each of them. If ABC goes bankrupt and drops the value of the stock until they are virtually worthless, the investor will not suffer from a complete loss because it still has $ 10,000 in defined, which is very good. This is in contrast with the overall and devastating loss that the investor would suffer if he put all the money inABC.

In determining the diversification of shares, it is important to realize that this only applies to a situation where the investor divides the investment given in various companies and industries. Shares diversification does not apply when an investor who has $ 20,000 for investment gives all the money to one company and then borrows or get more money to others to buy more shares in another company. In this type of situation, the investor does not like his risks, but rather such an investor increases the risks by giving more money than he can comfortably invest in both companies.

You are still using the example of ABC and DEF Company imagine that the investor has only $ 20,000 to invest. This investor has the opportunity to divide $ 20,000 into ABC Company and Def, but decides to put all the money into ABC. He then gets money from other sources in others to buy shares in Def. SuchThe investor does not practices the diversification of shares, but rather on the investor exponentially increased the risk, because if ABC goes bankrupt, the investor will still lose all $ 20,000 instead of only $ 10,000, which would help to pose a shock of loss. At the same time, there is also a risk that shares purchased from DEF could lose any if its value because of any future factor.