Diversification

Spreading your money across different investments so that one problem doesn't decide everything.

Diversification means not putting all your eggs in one basket. Instead of owning one company, you own several, ideally in different industries and situations. If one runs into trouble, it is only part of what you own.

Why it helps

Companies face different risks. A problem that hurts an airline might not affect a software company. When your money is spread out, a single event is less likely to cause a big loss on everything at once.

What it can't do

Diversification reduces the damage from any single company, but it doesn't remove risk. In a broad market decline, most shares can fall at the same time. It also means that one company doing extremely well has a smaller effect on the total.

Owning many companies that all depend on the same thing, for example ten companies from the same industry, is less diversified than it looks. Many people diversify through ETFs and index funds, which hold many companies in a single investment.