Diversification of stocks is one of the most important things to consider when you are investing.
In the most basic sense, diversification is the process of investing in several different types of investments sectors.
Diversification is important in order to manage your investments wisely.
For instance, you might want to invest in health industry, blue chips and IT corporation's altogether.
The probability that all of them fell at the same time is not that high.
In fact, in most cases, if one sector goes down, the other one goes up.
There by giving you stability even if one sector collapses.
Markets are associated with sector risks.
Sector risks are the risks associated with industry specific products.
Sector risks can be influenced by parameters like, commodity prices, industry cycle, demand for products, economic patterns etc.
One way to have automatic diversification is to invest in mutual funds.
Mutual funds invest the pooled funds of thousands of investors in different sectors.
This way the overall value of mutual funds remains stable, even when one industry sector goes down.
Like any other investment portfolio, diversified portfolio may contain bonds, stocks or indexes.
You can have your money invested in several different sectors and industries instead of just one.