Discover the pros and cons to stock diversification starting with foundations of diversifying, and the different ways it can be achieved.
. Understanding the basic concepts behind a diversified portfolio and how it can be implemented can go a long way in distributing portfolio risk. This article will cover the following concepts on stock diversification:Diversification in a general sense is the broadening of a range of products. In finance, diversification of a portfolio is utilised to reduce the risk of exposure to one particular asset or event.
Gilead Sciences on the other hand, is a pharmaceutical company conducting research into a coronavirus treatment. Prior to the World Health Organization announcing coronavirus as a global pandemic, the two aforementioned stocks had mostly a positive correlation. After the announcement, it is clear from the chart that the two stocks moved in largely opposite directions .
In conclusion, investors need to fully realise their financial goals and budget constraints prior to undertaking any form of investment. Once this is understood, investors may then look at diversification within their portfolio. To successfully diversify, the following points should be reflected on:There is no correct/accurate answer for this as studies continue to produce contradictory results. The general consensus amongst equity analysts and scholars point to anywhere from 15 - 30 stocks.
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