Investment Education: What is Diversification? Why not put all the money in one share?

It is natural to want to make profit in the stock market. But there is not only profit in the market, it also comes with risk. Understanding this risk, controlling it and investing for the long term is the hallmark of a mature investor. In simple terms, diversification means investing your money in different places rather than keeping it in one company, sector or asset class. Its main objective is not only to make more profit, but also to avoid huge losses.

Let us understand diversification with a simple example. Let's say you have Rs 1 lakh. You put all the money in one share. If that company's results deteriorate, dividends drop, regulatory issues arise, or market turmoil spreads, your entire portfolio can come under pressure at once. But if you distribute the same 1 lakh rupees in different sectors such as banks, insurance, hydropower, manufacturing, hotels, microfinance, mutual funds or cash, there is less chance that the entire investment will sink at once when one company or one sector is weak.

Companies from different sectors like commercial bank, development bank, finance, hotel and tourism, hydropower, life insurance, non-life insurance, manufacturing and processing, microfinance, mutual fund, others, trading are listed in NEPSE. This gives investors an opportunity to invest in different business models without being limited to one type of company. Why is it dangerous to put all the money in one share? Putting all your money into one stock means tying your investment fortunes to a single company's decisions, profits, management, debt, regulation, market noise and sector conditions. Even if a company looks strong today, its condition may change tomorrow. A rise in market value and a company's actual business strength are not the same thing. Some stocks have high growth in the short term, but may not have real earnings, cash flow, dividend potential or long-term growth behind them.

Putting all your money in a single share comes with these risks: First, company risk. A company's profits may decrease, bad loans may increase, projects may be delayed, management disputes may arise or regulatory action may occur. Second, sector risk. For example, the banking sector is affected by interest rates, liquidity and credit expansion. Hydropower is affected by project construction, borrowing costs, power generation, weather and policy issues. Insurance is affected by claims payments, capital requirements and regulatory directives.

Third, liquidity risk. Some companies have low turnover. After investing a large amount in such shares, trying to sell them may not find a buyer at the desired price. Fourth, emotional risk. When all the money is in a single stock, the investor is highly affected by daily price fluctuations. When the price goes down, fear sells and when it goes up, greed increases the chances of adding more. Not all sectors in the stock market rise and fall at the same time. Sometimes the attraction increases in banking, sometimes the turnover increases in hydropower, sometimes the attention of investors goes to insurance or hotels. This behavior of the market is known as sector rotation. As indices and companies of different sectors are traded separately on NEPSE, investors can create a mix of different sectors rather than relying solely on a single sector. Market data providers also show company and price details separately by sector, which helps in comparing conditions across sectors. What this means is that the sector that shines today will not always shine. Money circulates in the market. So investors should not get stuck on just one story.

Does diversification prevent losses or increase profits? Diversification does not completely prevent losses. Stocks of good companies can also fall when the market itself falls significantly. But it works to reduce the huge losses from one place. Think of it like insurance. Insurance does not mean that accidents do not happen, but when accidents do happen, it is easier to bear the damage. Diversification doesn't mean the market won't go down, but the chances of a single company or sector's mistake ruining the entire investment is less.

But an over-diversified portfolio is also not good. Holding 30 shares of Rs 5,000 and not studying a company is not diversification, it is unsystematic spread. Good diversification means allocating investments thoughtfully, objectively, risk-wise, and studied. How to do good diversification? There are three things to consider when building a good portfolio—the sector, the quality of the company and your time frame. 1. Choose a different sector

Putting all the money only in the bank, all the money only in hydropower, or all the money only in microfinance can be risky. Keeping companies with different business natures in the portfolio balances the risk. For example, a balanced investor might consider: stability from the banking or financial sector, long-term growth from insurance, project-based potential from hydropower, real product businesses from manufacturing, growth linked to economic activity from hotels and tourism, and experience in managed investments from mutual funds. This is not a mandatory formula. But that's the way to think—not all the money in one story, but on different bases.

2. Keeping different companies even within the same sector Suppose someone likes the banking sector. Having said that, it is not right to put all the money in one bank. Banks also differ in terms of bad loans, cost of deposits, loan growth, capital adequacy, management ability and dividend history. Similarly, not all companies are the same in hydropower. Some companies are generating electricity, some are in construction phase, some have high debt, some may take time to pay off. So after choosing a sector, choosing a company is even more important.

3. Cash is also part of the portfolio Many investors say that cash is not an investment. But cash is the biggest power when it comes to opportunities in the market. A good company can be bought at a cheap price when the market falls too much. But if all the money has already been invested, there is no option but to wait for the opportunity. So keeping part of the portfolio in cash or low-risk instruments is also part of diversification. What kind of portfolio to make? No single portfolio is suitable for every investor. Students, employees, businessmen, retirees, short-term traders and long-term investors have different risk appetites. But for educational purposes a common example can be seen as:

An investor who wants to take moderate risk can put the bulk of his money in relatively established companies, some in companies with growth potential, some in mutual funds or instruments of a fixed nature, and some in cash. An investor with a high risk appetite may hold more shares in sectors with growth potential, but he should not put all his money in one company. Low risk investors may prefer companies with dividend history, stable business, good financial condition and high turnover.

Don't make these mistakes when diversifying The first mistake is diversification in name only. It is not right to consider yourself diversified by having 10 companies in the same sector. There is a difference between owning 10 hydropower companies and 1 hydropower company, but sector risk still remains. The second mistake is to add shares based on rumours. The friend said, while buying shares because it came to the group, it was discussed on social media, the portfolio gets scattered.

The third mistake is to be greedy for cheap prices without understanding the company. It may be wrong to think that Rs 200 shares are cheap and Rs 1,000 shares are expensive. One should look at the company's revenue, capital, profitability, debt, earnings per share, net worth, price-earnings ratio and future potential. The fourth mistake is to sell the profitable shares quickly and keep the losing shares indiscriminately. This leads to portfolio being filled with weak companies. The fifth mistake is to have too many companies. Having a lot of company makes studying difficult. Diversification does not mean accumulating stocks beyond your control.

How to start a new investor? A new investor should initially understand the market, read the company's financial statements, look at the sector situation and learn with small amounts. The regulatory body has also been emphasizing the importance of investor education and financial literacy. Securities education materials and investor awareness programs help in making informed decisions in the market. It's a good idea to start by asking these questions: How does this company make money? Is its profit increasing or decreasing? How much is the loan? Is it capable of paying dividends or not? Isn't the price already too high? Is it easy to sell this share or not? What is my investment period? Until these questions are answered, it is risky to invest large sums of money.

डाइभर्सिफिकेसन र अनुशासन डाइभर्सिफिकेसन एक पटक गरेर सकिने काम होइन। बजार बदलिन्छ, कम्पनीको अवस्था बदलिन्छ, आफ्नो आम्दानी र लक्ष्य पनि बदलिन्छ। त्यसैले समय–समयमा पोर्टफोलियो समीक्षा गर्नुपर्छ। यदि कुनै एक सेयर अत्यधिक बढेर पोर्टफोलियोको धेरै ठूलो हिस्सा बन्यो भने केही नाफा सुरक्षित गरेर अरू क्षेत्रमा सार्न सकिन्छ। यदि कुनै कम्पनीको आधारभूत अवस्था बिग्रँदै गएको छ भने केवल “कहिले बढ्ला” भनेर पर्खिरहनु पनि गलत हुन सक्छ। अनुशासन बिना डाइभर्सिफिकेसन अधुरो हुन्छ। लोभ, डर, हल्ला र भीडको पछि लाग्ने बानीले राम्रो पोर्टफोलियो पनि बिगार्न सक्छ।

The most important thing Many people dream of becoming rich in the stock market, but very few investors stick around. A sustainable investor not only calculates the profit, but also the risk. They do not fall in love with the same shares. They like company, but don't trust blindly. They look for opportunities, but don't risk their future by putting all their money in one place. Putting all your money into a single stock can sometimes turn out to be a big profit, but that's not an investment strategy, it's a risky bet. Portfolio diversity, study, patience and discipline are essential for long-term success. A good investor in the stock market is the one who knows "how much to earn?" Before "How much can I lose?" thinks that.