Diversification means spreading your money across multiple investments in order to reduce risk. Instead of investing everything in one share, you divide your investment across different companies, sectors or regions. This helps prevent a single setback from determining your entire return.

By spreading your investments, you are less dependent on the success of one single investment.

If you invest all your money in one share and that company performs poorly, it can have a significant impact on your wealth. By spreading your money across multiple investments, you reduce that risk, as losses in one investment may be offset by gains in another.

Diversification does not eliminate risk, but it helps distribute risk more effectively. It is one of the most important basic principles of prudent investing and is often applied through holding multiple shares or through a broadly diversified ETF.

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