Diversification, financial strategy of holding different kinds of investments to reduce the risk of financial loss. An investor who holds stock in only one company risks losing his or her entire investment if the company fails. Investing in a number of different kinds of companies lessens the risk because it is unlikely that all of these companies will fail or lose value. Diversification also increases the opportunity for success. Placing money in different investments increases the odds that one or more of these investments will succeed.
To achieve diversification, many investment advisers in the United States recommend holding a number of different stocks and bonds from both American and international companies. Mutual funds are excellent investments for diversification because such funds may hold stocks in a variety of companies as well as various types of bonds. Owning other investments, such as precious metals and real estate, also helps to achieve diversification.
Contributed By:Samuel Case
Source : Microsoft ® Encarta ® 2006.
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