Investing in a single stock may be a good idea if the said company is doing well. However, there’s an enormous risk of losing out on all the money if the company fails to perform. Holding on to one stock can make you vulnerable to various factors that could send the stock on a downward spiral. This may include a weak economy, an industry slump, a sudden change in company management or a disappointing financial performance. Under unfavourable conditions, your sole stock pick might lose its value quickly, implying your investment too loses its value as rapidly.
Diversification is all about reducing the risk. Rather than holding onto one stock and hoping for its steady appreciation, professional investors diversify their portfolios to minimize the risk exposure to any one stock. If one stock in the portfolio declines in value, another stock balances the slack. Opinions vary about the right number of stocks to hold in one’s portfolio. The idea is, that each stock is unique in its volatility. But a group of stocks, if selected properly, are less vulnerable to extreme highs and lows
