Diversification

Diversification means spreading your money across many different investments instead of putting it into one, so that a single failure does limited damage to what you own.

For example, if you put $1,000 into one company's stock and that company fails, you can lose the entire $1,000. If the same $1,000 is spread evenly across 500 companies, $2 in each, one company failing costs you $2.

The trade-off runs both ways: if one of those 500 companies quadruples in value, you barely feel it, so diversification narrows the range of results at both ends. It also spreads risk rather than removing it, because when a whole market falls, widely spread holdings fall with it. Funds are one way people buy many investments at once, and fund shares are investments, not insured bank deposits.