THE BEECHMONT CREST ONLINE GUIDE TO STOCKS AND INVESTING
DIVERSIFICATION
- Investment in assets that are minimally correlated.
- In the context of the stock market, this usually means investment in the stock of companies that operate in different sectors.
- For example, suppose that you decide to purchase the stock of both Ford Motor Company and Cisco Systems. Ford Motor Company operates in the automotive sector. Cisco Systems operates in the IT sector. The automotive sector can be up when the IT sector is down, and vice versa. Therefore, the value of these two assets is not correlated.
- On the other hand, you would not be diversifying if you purchased the stock of both Ford and General Motors. Both of these companies operate in the automotive sector, so they are affected by many of the same economic factors.