Disadvantages of over diversification

In the last post what is diversification, we gave a glimpse of diversification and a simple example to understand how it reduces the risk. In this topic we cover the disadvantages of over diversification mainly by considering the stocks. As of now I am not touching diversification across asset classes. To start with, when anybody thinks of diversification, probably the first question in his mind would be, how much I should diversify?. The best answer would be ‘not much’. Please look at below graph to understand further. Image courtesy : thismatter.com/money In the above figure, there are two risks explained. One is Systematic risk: this is also called as market risk. It implies, when the market sentiment is negative, your security prices may drop, however good your stock may be. In those scenarios, your diversification strategy doesn’t work. If you invested in 10 stocks, the chance is that all your 10 stock prices may come down along with the market.

August 13, 2009 | Filed Under You should know | Leave a Comment

What is diversification?

Diversification, is the term most sought after by investors, portfolio managers. Let’s understand what is meant by diversification, advantages and disadvantages of diversification & How to reduce the risk with diversification in present and upcoming articles

If you know meaning of famous phrase "Don’t put all of your eggs in one basket” probably you would have already knew the essence of diversification. In simple terms, diversification is to create a portfolio that includes multiple investments in order to reduce risk.

Let’s discuss the pros & cons of diversification with the examples. Assume you have 1,00,000 bucks to invest and you invested all the 1,00,000 bucks in only single company. If the company gives the good returns it’s fine, but what if the company is in deep crisis for some reason? Most probably you would lose major portion of your investment if not all. Read more

August 2, 2009 | Filed Under You should know | 2 Comments

What is Hedging? Let’s understand

Most of the investors never do hedging in share markets. However, it would be good to understand what is meant by hedging with some examples. After all, knowledge is wealth in this century, especially in finance industry.

In simple, Hedging is your mitigation plan to reduce risks. In someway, we can compare hedging with insurance but it is not exactly same. In Insurance, for example insurance against your property, you pay some premium to buy insurance and if something goes wrong with your property then economic value of that property will be paid back to you. That means with a little premium you are transferring almost entire risk to other party (insurance company). But in hedging we can reduce the risk with many limitations. Read more

July 5, 2009 | Filed Under You should know | 2 Comments

How to survive a bear market

A bear market can be referred to as the situation in the market, where decline of atleast 20% of the stock prices or so and overall negative sentiment persists in the market.

Bear market is really tough time for the share market investors. It is this time, the investors learn best lessons in the market. Surving a bear market is as good as earning profits in bull market.

Let’s discuss some facts on how to survive a bear market.

If you are a share market investor, then you should understand that bull market & bear markets are part of business cycle. Both existed in the past, existing in the present and surely exist in the future. Learn lessons from the past.

May 24, 2009 | Filed Under You should know | Leave a Comment

About CEO, COO and CFO of a company

CEO, COO & CFO forms the top management of the firm and look after day to day to operations but with different responsibilities. These individuals are hired by board of directors.

CEO(Chief Executive Officer): CEO is one of the highest ranking corporate officer and the head of the management. With the assitance of senior managers CEO implements the decisons approved by board of directors. CEO directly reports to chairman/board of directors . Sometimes, he will be designated as president of the company

COO(Chief operating officer): COO is one of the highest rank manager of a firm responsible for managing the day-to-day activities of the corporation and for operations management. He is often designated as vice president. Read more

May 23, 2009 | Filed Under Stock market Terminology, You should know | Leave a Comment