Financial Encyclopedia
Diversification
Definition
Diversification is a way of investing money in different assets that are not interconnected with each other. Diversification is used to reduce risks when investing.
Example
A good diversification strategy is to buy stocks of companies from different countries and sectors of the economy.
More detailed
Risk for an investor is a situation when he does not receive the expected return on his investments or loses part of his investments due to a decrease in the price of assets.
Diversification helps to reduce such risks due to the fact that the investor does not invest in any one asset, but collects a portfolio of various instruments that have little to do with each other. Then, even if one of the investor's securities falls in price, others are likely to grow - and the yield on them will eventually cover the losses that have arisen.
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