By holding stocks from different categories, diversification reduces risk in the world of investing. Diversification allows you to minimize risk, which will likely help you maximize your stock returns by investing in different stocks that are likely to react differently to the same event or market condition.
Steps to diversify your portfolio
Invest in companies with different market capitalizations. These categories are divided into small-cap, mid-cap, and large-cap stocks.
- Buying large-cap stocks can provide stable, consistent gains, but may not provide great growth. Because these established companies’ stock prices rarely plummet, large-cap stocks also help your portfolio weather volatility.
- Mid-cap stocks balance the potential for high returns with investor confidence, as these companies are on their way to becoming established.
- Small cap stocks are also an option, as these types of investments offer the best opportunity for above-average growth, but also come with much higher risk. For this reason, it is important to build a basket of stocks of different sizes to balance the risk of the smaller companies.
Invest in different sectors
To avoid risk, investors should also consider investing in different industries.
Investing in different industries, such as technology, retail, healthcare, entertainment, food, energy, manufacturing, and many more, can diversify your portfolio.
