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Investment diversification is the spreading of investment capital through multiple financial instruments and/or economic sectors. An example of diversification is stock ownership across a number of industries such as oil, utilities, biotechnology, retail etc. Diversification is similar to hedging in the sense that it is employed to lighten negative impacts from downturns on a specific financial instrument, economic condition/sector, and localized investments.

Many people diversify their money in different ways. For example, someone may put money into a house, have a savings account, own jewelry, use a money market account, hold certificates of deposit (CD's), and save through Individual Retirement Accounts (IRA's) or a pension fund. This is diversification in the sense if one or other of these investments falls through, there is another to relieve the overall risk to one's net worth. The hallmarks of diversification are listed below:

-Distributes money across an array of investments -Shields investors from volatile fluctuations in prices
-Broader investment net may capture otherwise unrealized capital gains -Allows one to make riskier investments while simultaneously limiting exposure to associated risk

Diversifying through Mutual Funds:

Diversifying risk is easy to do if one has tons of money to spread around. However, for those who don't have millions of dollars, mutual funds do. What's more, mutual funds often consider diversification an essential part of their investment strategy even if it is just within one economic sector. For around the first 30 investments an investor or mutual fund makes, the level of risk declines significantly, especially if those investments are across different industries. However after a certain point, the lowering affect diversification has declines making the risk to number of investment ratio change less and less. A few ways diversification in the stock market takes place including through mutual funds are listed below:

-Diversified Mutual Funds -Investment in international as well as domestic stocks
-Spreading of market timing risk by dollar cost averaging i.e. investment of a fixed amount every month -Selection of stocks that span a number of economic sectors -Investment in large cap, mid cap as well as small cap stocks and pink sheets -Ownership of stocks, stock mutual funds and exchange traded funds
-Diversification through investment in multiple stock exchanges.

Other Types of Investment Diversification:

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