Diversification (finance)

Diversification is a portfolio strategy used when purchasing investments to cut back on exposure to risk. It is used on investments like stocks, bonds, and real estate which all move in different directions. The volatility of these investments is limited because not all industries or individual companies move up and down at the same time or same rate. So diversification reduces both the upside and downside potential for risk and allows for more consistent performance under a wide range of economic conditions. To sum this up, diversification reduces exposure to risk by spreading investments over the industry instead of limiting to volatile investments. By spreading or diversifying investments it eliminates the extremes, protecting from major loses and major gains but provides a safe constant gain.