If you are trusting just one stock too much you might risk all your money in it. Wise investors always spread out their money among various stocks to minimize the effects of a bad day in the stock market. No matter how stable you think a company is, never invest solely in that company. Diversification is the point.
Diversification does not mean just buying different stocks. It is also about investing in completely different industries. For example, if commodities are doing bad then oil may be doing well and vice versa. Concentrate on investing in different areas so your portfolio is not affected by a big hit in one specific industry.
Way to Decrease Your Risks
Diversified portfolios are proven to see a more consistent return on investment than investing in only one or two stocks. It is also a great way to decrease your risks while maintaining aggressive returns. And even penny stocks can be used to diversify.
Let’s take the example you have invested in just one hot stock you were completely sure about. Another day there some bad news about this companies and the investors make a run for it. With the stocks taking a dive this is very bad news for your poor portfolio. On the other hand if you have invested in a dozen different stocks and just one has a bad day you other stocks keep your portfolio strong. I think you can seethe difference.
Also you don’t have to limit your portfolio to stocks. There is also real estate, real property, and bank CDs to name a few other markets to invest in. Diversification is the idea of protecting yourself while making satisfying gains. Study the best investment options for your particular goals and diversification will help you along the way to win the game.
Always invest in more than one good stock!