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.

Take another example, where in you have 1,00,000 bucks and instead of one company, you have invested them in 5 companies. Should you compare this example with the above one, probably you may have already got the idea, which is better example to minimize the risk. Yes, you are right. In the second example, the risk of losing money is reduced drastically.

Whatever we discussed here is very simple concept of Diversification. Stay glued to LastBull, to discuss further on Diversification, diversification strategy, investment diversification, stock diversification and asset diversification
 

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Mohan Bhupathiraju

Mohan Bhupathiraju is a co-founder & editor at LastBull.com. Handled multiple projects in BFSI for few of the Forbes top 100 companies. He works in IT industry in the US. Presently working on start up Ideas in Finance & Technology niches.

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