If an investor invests in lots of companies, each company individually may be a risky investment. However, many investors use strategic methods that can be applied to their investing portfolio for reducing risk levels, by spreading the investments chosen.
This theory is generally accepted in the trading circles. Do they mean that someone should invest in 7 different companies to reduce the risk levels? No. Investors have said that it is important to make sure that the constituents of the portfolio are as diverse as possible.
This is probably the case because the adverse affects that affect one investment may mean that all the other investments will feel the affect as well, if they are not as diverse as possible.
Many investors recommend people to consider the possibility of investing or picking stocks in each of a different number if sectors, as opposed to choosing stocks in only one niche or sector. Often times you will hear an investor say avoid having two stocks in businesses that are closely related.
There are a set of generally accepted rules in the world of stocks and trading for reducing risk levels. These rules are not complete but they can give you a start on understanding the different ways of reducing risks when playing the stock market.
Risk can be possible reduced by owning a mixture of stocks and other investments, owning several different stocks, owning stocks in different industries, owning stocks in large companies and small companies and having a fixed point of where you will always cut your losses.
No one investor is exactly the same. There is no system that fits all. Instead you will have to look at all the trading systems you can get your hands on and you will need to design a system for yourself. Different portfolios are tailored for people who have higher or lower tolerances to risk, different time plans and different income or financial goals.
Some people may want to have a monthly income and others may want to build up capital. The components that have just been outlined are up to the individual investor.