In our previous post about diversification we laid out the benefits of using portfolio diversification to protect your investment portfolio by making it safer. Now we want to explain the different investments you can use to help diversify your portfolio.

Diversification means that you hold multiple investments that are as negatively correlated as possible. For this post we want to talk about using different categories of stocks for portfolio diversification. Stocks are a very important part of a portfolio because they can provide great returns. But there are many different classifications of stocks and with diversification it’s best to own many types to make sure they are as negatively correlated as possible.

In this post we want to talk about investing in stocks with different market caps. Market cap deals with the size of the company. A large cap (large company) usually means that the stock is safer then a small cap (small company). However, a small cap stock usually provides a greater return on your investment (ROI). There is also mid cap which you guessed it, is a medium sized company.

Owning companies of different sizes can be very important to portfolio diversification. During a market recession large cap companies tend to do better because they often have larger cash reserves, more lending power, and a more stable customer base. Smaller companies can have a lot less operating cash and any bumps in the road can result in the end of the company. But when the economy is doing very well, small cap stocks tend to grow at a faster rate then large cap stocks.

For our next couple posts in this series we’ll talk about also investing in stocks from different industries and countries to help achieve greater portfolio diversification.

Read all of our posts about diversification.

Tags:   Investment Diversification Strategy   Learn How to Invest   Stock Market Cap  

Posted on August 28, 2007 9:07 PM | Digg | del.icio.us