Diversification is a technique that reduces risk by allocating investments across various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event.

What do we mean by diversification?

Diversification is the act of investing in a variety of different industries, areas, and financial instruments, in order to reduce the risk that all the investments will drop in price at the same time. ... Through diversification, investors can offset losses on some investments with gains on others.

What is diversification with example?

For example, an auto company may diversify by adding a new car model or by expanding into a related market like trucks. ... If a company is expanding into industries that are unrelated to its current business, then it's engaging in conglomerate diversification.