subject: Why It Is Important To Diversify Your Stocks [print this page] In tough times like these, it is great if you have several sources of income. One way people do that is to make money from their investments and the stock market is the most common way.
Purchasing stocks gives an individual an opportunity to own a piece of some of the largest companies in existence. These companies are delighted to share a portion of the profits that are made each quarter. Some people who are smart investors even make a full time income off of the earnings that their stocks provides.
Beginner investors often inquire whether they should put all their money in one stock or whether they should spread it out amongst several holdings? Most financial planners will tell you that putting everything you have into one stock is too much like gambling. It is better to invest smaller amounts in a handful of different companies thus your risk is spread out more.
Putting all your money into one stock means that you could have bigger losses and bigger gains than if you diversify and put your money into a basket of stocks. With multiple holdings in your portfolio, a bad year from one of the stocks can be offset by the other stocks that might have done better. The preservation of capital is important for most people and diversification will help that happen.
If you want to be invested all the time, then having all your money in just one stock holding will make that difficult. This is because when you decide to sell, you will have all your money out of the market. With multiple holdings, you can sell a stock or two and still have money in the market making you money.
Diversification is important when one buys stocks because it is integral that one take measures that will help him or her offset any losses that are expected to happen at some point in time. Performance and participation are two main reasons why stock investors should spread their investment capital over several different stocks.
