Five Ways to Diversify Your Stocks

Different Industries and Sectors

You should divide your stock holdings among different sectors, since market forces may cause one or more sectors to decline while others stay steady or even rise. Within each sector are numerous industries and sub-industries. A sector may perform well overall, but different industries in the sector may be performing poorly, while others perform even better than the sector as a whole. Avoiding placing all of your investments in a single industry of a sector will help with your diversification.

Investing in stocks offered by companies in other countries helps you diversify your investments, rather than keeping all of your investments in the United States. The United States has not come in as the top performing market in the world since 1970, according to Charles Schwab, meaning other countries offer greater investment opportunities. Instead of keeping all of your stock investments in one, or even two or three countries, you should divide your stock investments among several countries.

Market capitalization refers to the size of a company. Stock researchers tier companies based on market capitalization, often dividing them into three or four groups. To calculate the market capitalization, or size of a company, multiply the amount of stock shares investors and not the company hold by the current price for a single share of the company's stock. Standard and Poor classifies companies with a market capitalization of less than $750 million as small, those with a capitalization of $750 million to $3 billion as mid-sized and companies with a market cap of more than $3 billion as large, according to wealth management company Majestic Eagle Agency. You should divide your holdings among these different-size companies for the best diversification.

Use a mixture of both growth and value stocks, giving your investments the benefits of a conservative investing strategy along with an aggressive one. Growth stocks involve a higher level of risk since the stocks have a history and projected future of high growth rates, including a high price-to-earnings ratio. Companies that have growth stocks also show a high return-on-equity ratio. As growth companies continue to grow rapidly so do their stock prices, meaning your investment grows quickly. Value stocks, on the other hand, do not grow as quickly. Value companies generally are larger and more established, meaning the risk of the value of their stocks dropping suddenly is less than for growth stocks.

Choosing a stock based on its beta value helps you make stock purchase decisions that help your investments fare well under adverse market conditions. The beta value of a stock is a measure of the stock's performance as related to the overall market's performance. For example, a stock with a beta value greater than one should have price swings that are greater than the overall market's price swings. Stocks with a beta value between one and zero should have price swings that are less than the market's. Depending on your investment strategy, create a mix of stocks with different beta values.