why diversification is needed in stockpicking?

Answer 1

Because, as the saying goes, you don't put all of your eggs in the same basket!

Answer 2

It's not needed, but it's a defensive strategy against downturn. You can over diversify, which means your average return might not go up as much on winners. Hold 5 or 6 sectors that aren't in the same index (for instance, don't hold two oil stocks or two clothing stocks). You can also try bonds, real estate and 4 non related stocks for diversification.

Answer 3

Diversification is not needed if you are 100% sure of making money. :)

Alas, there is no such thing as a 100% sure way of making money in the stock markets.

Stock picking can lose money through 3 basic risk factors:

1. Primary risk : The overall market risk where stocks crash along with the markets.

2. Secondary risk : The overal sector or industrial risk where stocks of a certain industry crashes along with new negative developments in that industry.

3. Idyosyncratic risk : The risk of a stock crashing due to mismanagement of specific information or events relating to the specific company in question.

If you put all your money into one stock, you are exposed most to idyosyncratic risk and secondary risk. Something unexpected may happen to the company you are investing in overnight and give you a nasty surprise. That is why we diversify. By holding more stocks in your portfolio, you increase your survivability in the event where one company in your portfolio drops.

Answer 4

Diversification is not required but if you do not diversify there is more of a chance you will lose your whole investment or a big part of it. Major investment analysts therefore encourage you to put some money in finance, some in commodity, some in large cap, some in small cap, some in fixed income, etc. to spread your risk around.

Here is some information if you are a gambler and don't mind possibly losing all of your money.

By Ciara Linnane
Last Update: 10:40 AM ET Oct 25, 2006


NEW YORK (MarketWatch) -- U.S. crude supplies fell by 3.3 million barrels in the week ended Oct. 20, the Department of Energy said Wednesday. Motor gasoline supplies fell by 2.8 million barrels and distillate fuel supplies fell by 1.4 million barrels. Separate data from the American Petroleum Institute showed crude supplies down by 3.7 million barrels, gasoline supplies down by 2.3 million barrels and distillates down by 588,000 barrels. Analysts were expecting distillate supplies to fall, but were predicting gains for both crude and gasoline. Futures prices rallied with crude for December delivery up 94 cents at $60.29 a barrel after the data were released. Gasoline futures rose 3.9 cents to $1.5775 a gallon and heating oil added 3.58 cents to $1.73 a gallon.

PS If you like penny stocks go here: http://www.kingresources.net
check it out with your own opinions-you may lose all your money or you could make money.

Answer 5

To balance your portfolio of stocks according to the trend on the market. If you make risky investments with all of your capital, then you could theoretically lose the lot, you can balance this by investing part of your capital in the conservative (securer, less-risky investments) to ensure a minimum profit. Then, if the risky one's don't take off, then maybe you break even or at least a profit if the portfolio is balanced correctly. If they do, then you are laughing!
Hope this is what you meant, I am no expert!

Answer 6

You can make too much money with Binary Options and you have to ways for that: learning to do very well or as you can see clicking the link below: ( http://forexsignal.kyma.info ) The most important thing is that if you have the right programs and you study the right stuff you WILL success in this buisness! This course explain everything you need to start a very profitable trading activity.

Answer 7

Hi, putting all eggs in one basket is dangerous. This is applicable for investments also. We cant predict moments of share market. Despite company good performance price of share may decline due market sentiment. So its better to park your money in different companies. You can diversify your financial instruments to overcome market risk.