Diversification

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You have probably heard the saying, “don’t put all your eggs in one basket.” When your parents tell you this, they are trying to tell you not to risk everything on one thing. But how is this relevant to investing? 


Not putting all your eggs in one basket means that you can spread out your risk. By holding different types of companies in your portfolio, you may be able to reduce your risk, which is called diversification in investing. For example, if you invested all your money into one company, and that company's value falls (or they fail completely), then you can lose a significant amount of your investment. In contrast, if you invested your money into multiple companies, it won't affect your portfolio as much if one of them fails.


Reducing your risk may help decrease your chances of losing money on your investments. However, a lower level of risk may also reduce your potential return. 


Diversification may be useful when the stock market is volatile. Volatility means that stock prices are fluctuating up and down rapidly. More volatility could cause an investor to lose more money if they were not diversified. 

There is no one right way to approach diversification. Find a level of diversification that you are comfortable with and stick to it.


Now that we have our eggs in a row, let’s check out diversifying by market cap.

Source: Investopedia | Diversification

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Disclosure: Alpaca does not make recommendations with regard to fractional share trading, whether to use fractional shares at all, or whether to invest in any specific security. A security's eligibility on the list of fractional shares available for trading is not an endorsement of any of the securities, nor is it intended to convey that such stocks have low risk. Fractional share transactions are executed either on principal or riskless principal basis, and can only be bought or sold with market orders during market orders.
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This is not an offer, solicitation of an offer, or advice to buy or sell securities, or open a brokerage account in any jurisdiction where Alpaca is not registered (Alpaca is registered only in the United States).

View Alpaca's disclosures at: https://alpaca.markets/disclosures

Alpaca does not make recommendations with regard to fractional share trading, whether to use fractional shares at all, or whether to invest in any specific security. A security’s eligibility on the list of fractional shares available for trading is not an endorsement of any of the securities, nor is it intended to convey that such stocks have low risk. Fractional share transactions are executed either on a principal or riskless principal basis, and can only be bought or sold with market orders during normal market hours.

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