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What is investment diversification and why is it crucial for novice investors?

Date: June 14, 2024 Time: 19:11:05

Investing consists of buying shares of a company in exchange for a return. Specifically, investors can obtain a profit through the evolution of the price of shares in the market. But you also have to take into account when investing that this return can also be negative, that is, you will lose money. It is one of the main risks that must be assessed when deciding to invest.

To prevent losses from being as small as possible, different strategies can be carried out and the special importance of diversification stands out. The Spanish financial regulator affirms that “concentration risk is the possibility of suffering losses by investing too high a proportion of the money available in a single asset or type of asset.” For example, invest all the money in shares of a single company or in shares of several companies that belong to the same sector of activity.

This risk is due to a lack of diversification. It is an investment strategy that is based on the idea that it is less risky to buy a little of many things than a lot of one thing. In other words, diversifying consists of distributing the money among several different investments. Thus, “possible losses from some investments could be offset by gains from others,” the CNMV points out.

Share the investment

In this way, the investor must maintain a portfolio with assets with different levels of risk and potential profitability, from different sectors of activity -industry, services, food, new technologies, banking, energy, construction…- or from different geographical areas. ficas

But Blackrock, the world’s largest asset manager, cautions that “diversification is not just about mixing stocks and bonds in a portfolio. It requires understanding how different stocks and bonds interact with each other.” And he points out that two portfolios with the same reserve of assets –weight distributed among the different assets-, “can have completely different levels of risk.”

Diversification is a strategy with the objective of limiting exposure to significant losses in the market. It is important to keep your goal in mind because in some cases, it can also limit the scope of a favorable moment.

Recommended products to diversify

When it comes to diversifying, ETFs stand out. These are listed funds – known as The CNMV affirms that they offer the possibility of participating in the evolution of the main markets, without the need to invest in each and every one of the values ​​that make up the reference indices.

In addition to the diversification they allow, ETFs stand out for offering low-cost operations. Expenses are generally lower than those of traditional investment funds. As with other products, to invest in an ETF, in the first place, it is necessary to resort to a financial intermediary authorized by the CNMV. This can be verified in the Official Records of the financial regulator. And once an intermediary has been chosen, a securities account must be opened to operate. From there, the investor will be able to buy or sell shares through orders.

* This website provides news content gathered from various internet sources. It is crucial to understand that we are not responsible for the accuracy, completeness, or reliability of the information presented Read More

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.
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