investing guide

Diversification

stock diversification

When investing you are going to hear the word diversification time and time again. It simply means do not put all your eggs in one basket. This is one reason a lot of people prefer mutual funds or index funds because they offer instant diversification. This is good in some ways to protect your overall investment but also bad in others ways.

As an example a mutual fund or index fund can contain hundreds of different stocks; which you just own a tiny portion of when you invest in them. So if one stock does good or bad it simply does not impact the investment as much as if you simply owned just that one stock individually with the same amount invested.

It really comes down to someone's risk/reward tolerance.

Many people also could never afford to buy enough individual stocks on their own to diversify their portfolio's.

So what is a good amount of stock to own to be considered diversified?

You are going to find many different answers to that question, but from what I have read the minimum goal is 10 different stocks in different sectors of the market.

TIP - Be careful not to become over-diversified.