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What is a "portfolio"?

A portfolio is a mixture of investments of different types and risks that an individual or institution may own in hopes of making more money over time. It is generally defined as the collection of investments held by an individual, investment company, or mutual fund.

What is "diversification"?

Diversification is the act of making investments in different categories with the hope and expectation that the risk of losing money is spread out or diversified within the portfolio, thus reducing the overall risk of losing money on the whole portfolio.

How does diversification reduce my risk?

Diversification reduces your risk because when you have a variety of investments in a portfolio, the fluctuations in the value of any one investment have less of an effect. If you have several uncorrected investments, you may minimize the risk of losing money.

What does the saying "Don't put all your eggs in one basket" mean?

It demonstrates the need for diversification. If you put all your investments in one stock, and the stock price falls, you lose a major amount of money. If you had put your money in three different stocks, and two of the three go up, and only one goes down, you could still have made money, or perhaps lose less money than if your investment was concentrated in one stock.

What is an "individual investor"?

An individual investor is a person who directly or indirectly purchases stocks or bonds, and invests in the market on his own account.

How many individual investors exist in the United States?

It is very difficult to estimate the precise number of individual investors in the United States because so many people invest in the markets in someway: by having retirement funds; buying individual shares of stock in a company; keeping money in a money market fund, which, in turn, invests the money; owning mutual funds; and payment of insurance premiums. All told, there are most likely more than 200 million Americans with some exposure to the financial markets.

 
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