What is Diversification?

Diversification is a business development strategy that allows the company to enter additional business lines that are different from current products, services or markets.

The diversification of business activities brings competitive advantages, allowing companies to reduce business risk. This is why they are a great business development tool. However, successful implementation requires in- depth knowledge and methodical assessment of the company and its environment. And while diversification is sometimes difficult for small businesses, it can prove inevitable when the home markets become unviable.

How is diversification adopted in investments?

Investment diversification is one of the most well-known applications of this tactic, as it is often widely recommended to beginner investors.In short, diversifying investments means opting for more than one financial product to invest your capital.

Following the example of the previous section, although it is known that there is no guarantee that a generalized fall in the market will not occur, when expanding the component items of the portfolio, the investor protects himself from the occasional losses of a single sector, for example.Thus, the investor learns to relate the risks, which are not always the same.

In view of this, risks are categorized into two main types: systemic and non-systemic risks.The first, also known as non-diversifiable risks, derives from major financial collapses, in which the entire economic structure is affected.The second, also called diversifiable risks, is related to declines in a single sector or company. That is, they are economically isolated.

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