Diversification is the Mantra! By Seomul Evans At Isnare.com Ezine Articles

The stock market is a place where there are no sure shot winners. It can go either way and it is a gamble. Everyone knows that. Well, then still there are people who invest their wealth on one particular stock. That is stretching their chance a bit too much. A bad gamble, really!

When it is understood that no stock has 100% guarantee of expected returns why would any bet on only one? Why don’t you buy as many as possible judiciously and spread the investment around. It is not just that you got throw dollars at any X, Y and Z and feel happy that you have diversified your investments. The very synonym of diversification is to broaden your horizons. You don’t broaden your horizons randomly, but learning and evaluating. Once you have done that then you judiciously invest in a number of stocks and spread the risk attached to the stock market gamble.

There could be something wrong that can happen with one stock, but it wouldn’t happen to every single stock you own if you have diversified. If you lose in one, you may gain in another. It will balance out and you will be on the green and safe. If you put all your eggs into one particular stock basket and if that particular stock goes on a downward spiral then you are holding an empty plate. That is not a situation you would want even your enemy to be in.

When you go investing, you do not just pick your favorite industry and go for it. Something like the motor industry for e.g.- if you take Ford, that’s fine. But do not go for the second investment in GE and then some other XY Car Company. Now that too comes under the phrase of putting all stocks in one industry basket. The industry as a whole can go kaput and you will face ruin. Diversify the sectors; go for energy, computers, tech, housing, there’s a whole world out there that you can invest in.

Do not over concentrate on any one particular stock and get hurt. Even the stock brokerage firms get jittery over the over-concentrated stocks. It will bring them down and they know it. In fact, it even hits at their value and credibility in the market. It is not encouraged by professionals and should not be touched by common man either.

A company could look like it is positively thriving and maybe it is. Based on its current status you will find that just everybody will rush over to buy stocks off it. However it does not take long for anything to happen. There could be a fire or perhaps an earthquake, which could strike at the headquarters of the company. What happens then? In such a scenario the stock could take a downward plunge and may never be the same again. People who own stock in the company would stand to lose everything.

The moral of the anecdote is obvious – do not invest everything on one particular stock. Diversify your stocks and allow them to share the risk. That way you can be at least sure that you are not going to lose everything or lose big time. In fact, you can even see some slow but steady improvement in your stock values and you can call it a real solid investment.

The stock market is not usually considered as a solid investment and one of the first thing any beginner learns about investing in stock markets is this: Do not invest your life’s savings, just invest what you have got to spare!

Well, that sums it up neatly.

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