by Erik Van Tongerloo

Created on: September 04, 2007

Diversifying your risk in the stock market is the key to reach a high return of your investment. Nobody can predict the future of their investments but need to understand that the stock market can be very volatile. Understanding how the stock market works in an important issue to make the right choices.

The stock market is the place where shares of many companies are traded. In economic terms supply and demand determinate the value of the shares. The values of the shares are always dropping and rising and of course everyone wants to buy on a low price and to sell on a high price. It is not difficult to understand that diversification will limit the risk on the return of your portfolio.

There are many ways how you can invest in the stock market and limit your risk by diversifying in the kind of shares. It is recommended to start with investing at a young age and learn the different techniques by investing in individual shares or mutual funds.

The difference between both is that in case of individual shares you need a high capital to diversify in different shares because the costs to buy shares of one company are mostly very high; there is always a fixed amount of costs no matter how many shares of the same company you buy. When you buy a mutual fund you invest immediately in many companies.

People who can afford to invest a lot of many can consider buying shares. The key to success is diversifying and there are a lot of possibilities. You can reach a higher return than mutual funds because the volatility is much higher and can give higher returns but also greater losses.

A lot of research is necessary for diversifying your portfolio and it is recommended to buy almost 50% blue chips. These kinds of shares will give you mostly a good return and a high dividend on the long term and the risk of your total portfolio will be limited.

Investing in individual shares of technology, telecom, emerging markets and penny stocks are always a great risk. It can be useful to buy a certain percentage of your investment in these shares but you can also lose a lot of money. If you remember the stock market crash of 2001 you will notice that the value of many of these shares have now a value which is still more than 50% less and will probably never reach the same value.

What determinate the choice of buying individual shares or mutual funds? A good question but not easy to answer! Knowledge of the stock market and understanding which shares are cheap or expensive are the most important

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