Diversification
Also called: diversify
Spreading money across many investments, so that a problem with any one of them does limited damage.
Holding many companies in different industries reduces company-specific risk: if one fails, it is a small part of the whole. Diversification does not protect against market-wide falls, when most shares drop together.
Owning many shares in the same sector is less diversified than it looks, because they tend to move together.
Example
With ₹1,00,000 split equally across 20 companies, a company that falls 80% costs you ₹4,000, or 4%. With everything in that one company, you would lose ₹80,000.
Learn more in these lessons
- The risks of investing in sharesWhat are the risks of investing in the stock market?
- Correlation and causationWhy doesn't correlation mean causation?
- DiversificationHow does diversification reduce risk, and what can't it protect against?
- Asset allocationHow should you split your money between shares, fixed income and cash?
- Position sizing and concentrationHow much of your portfolio should you put in any one investment?
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