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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Sunday, June 11, 2006

Stock Diversification

When investing for your stock portfolio (retirement and non-retirement) often people will own a couple of individual stocks. One of the problems with owning a couple stocks is the lack of diversification. Let's say you own stock in two companies, and those two companies end up being run poorly or cannot make a steady profit. By investing in only two have have little diversification and you are exposing yourself to way too much company risk (risk relative to the performance of that stock).

The larger the amount of stocks you own the less risk you assume and typically you will be well diversified. If you own 100 stocks you have eliminated almost all of your company risk. It is difficult to own 100 stocks on your own so many people turn to mutual funds. Mutual funds have the ability to invest in scores of stocks much easier than you can plus they have the added benefit that they are professional investors. This is a good option for most. However, market risk is not eliminated by holding scores of companies because although your company risk is extremely low you cannot get rid of market risk.

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