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Managing your risk in the stock market through diversification.

As most of us realize, investing in the stock market is inherently risky. Even the giants can fall, whether through poor management decisions or due to innovative new technologies or methodologies developed by their competitors. Smaller companies can fold for the same reasons or by being out-priced by larger competitors who can afford to take losses for a period to maintain their supremacy in the marketplace, despite providing an inferior product.

Diversification is a management technique that allows you to reduce the overall investment risk of your stock portfolio. By spreading your investment capital, a loss in one investment can be countered by gains in others.

A good analogy might be a casino, especially since investing in the stock market could be considered a form of gambling. The player bets (invests) at a single game table, they may profit if they are lucky but there is a high risk of losing their stake. Casinos play many games with several players in each, all at the same time. They payout to some players, but the take from others more than compensates them; otherwise they wouldn't be in business. With diversification in the stock market, you are changing yourself from a player to "the house".

The stock market is divided in three main ways, by stock exchange, business sector and market capitalization. It is preferable to diversify your investments between all three as well as within them. Let's take a look at each.

1. Stock exchanges.

Many people only think to purchase stocks through their nearest stock exchange. In this day and age, it is not only possible but advisable to purchase shares from several. As well as the New York Stock Exchange consider one in Europe, London and Frankfurt exchanges are worth a look, and one in Asia, possibly Hong Kong, Shanghai, Australia or New Zealand.

2. Business sectors.

Companies are divided into business sectors based on the industry they are primarily involved in; such as financial, manufacturing, utilities, Internet, Health, etc, etc.

3. Market capitalization.

The market capitalization of a publicly listed business, be it large conglomerate or small company, is basically determined by the share price multiplied by the number of shares. Approximately, market capitalization groupings are nano-cap, up to $50 million, micro-cap, $50 to $250 million, small-cap, $250 million to $2 billion, mid-cap, $2 to $10 billion and large-cap, over $10 billion. This is the market

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