Think of the old saying “Don't put all your eggs in one basket.” An investor can spread, or minimize, risk by investing in a variety of stocks across different investment classes and instruments. This process is referred to as diversification.

Diversification is important in investing, because markets can be volatile and unpredictable. By diversifying your portfolio, you significantly reduce the likelihood that any one investment will seriously hurt your overall portfolio performance. This allows you to benefit from the growth potential of the market while avoiding the risk associated with investing in a single stock or small group of stocks.