Definition

Portfolio diversification is the practice of spreading out portfolio capital into several different areas. A portfolio of ten different stocks is more diversified than a portfolio of five different stocks. Spreading investment capital over multiple financial markets such as stocks, bonds and futures is another form of portfolio diversification.

Stock Market

Portfolio diversification in the stock market consists of not only investing in multiple stocks, but investing in stocks representing different sectors of the market. A portfolio that focuses only on one sector, such as technology, is not diversified even if capital is spread over several stocks. This is because the stocks are subject to the same factors and will likely be highly correlated. Instead, someone holding technology stocks could diversify by investing in other sectors, such as pharmaceuticals, real estate and retail.

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