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How to diversify - stocks and shares

The value of shares is influenced by 2 key things:

  • The performance of the company itself
  • The more general economic conditions, both overall and in the sector in which it operates

Economic performance of the wider market will influence the company’s future performance. If the economy is performing well, there's an expectation that companies will make increased profits and there tends to be demand for company shares, so their value rises. If the economic outlook is bleak, investors tend to move away from shares, so their values fall.

Diversifying with collective investments

One of the simplest ways to diversify is through funds or collective investments. These include unit trusts , Open Ended Investment Companies (OEICs) and Exchange Traded Funds (ETFs) . All of these invest in a variety of shares, gilts and bonds or other assets, in line with the stated aim of the fund. The exact mix depends on the overall objective of the collective investment. We’ll look at these types of investments in more detail later.

As well as diversifying using different investment types, it’s a good idea to hold a good balance of cash savings in your portfolio. An investment portfolio that's diversified can generally be expected to move significantly less and, therefore, produces more balanced returns. But remember, even well-diversified portfolios are at risk from market movements. All investments can fall as well as rise.


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