Understanding Diversification in Stock Trading to Avoid Losses

It is important to have a diversified portfolio in order to minimize risk.

What is Diversification?

• A variety in your pool (a mix of companies, e.g. tech, oil, industrial, pharmaceutical)
• You want to have a mix of industries so that if one industry has a bad year, the rest of your investments still have the potential to do very well
• If you invest everything in one industry and it does poorly, you’ll lose money in all of your investments
• Example: If all of your stock in technology companies (Apple, Google, Microsoft) and technology takes a big hit, all of your stocks go down.
• You are taking a larger risk if you confine yourself to one industry.
• Keeping your portfolio diversified is especially important if you are new to the stock market.