You have probably heard of the old saying, "don't put all your eggs in one basket." When choosing stocks, investors try to invest in a few different companies so that no one stock that loses its value can affect their whole portfolio (the basket of stocks and other investments). The act of investing in several different types of stocks to achieve this goal is called diversification.

Investors diversify their portfolios because when a stock goes down or rises in value, other stocks in the same industry tend to go down or rise in value as well. This means that if General Motors stock goes down, the stock of Chrysler is also likely to be lower because the two companies are both in the automobile industry. In order to protect the value of their portfolios, investors diversify by buying the stocks of companies in different industries so as to reduce the chance that the entire portfolio will lose too much value if one industry has a problem. So, for example, an investor might include the following stocks in a portfolio: General Motors (car industry), IBM (computer industry), and McDonald's (food industry). Because these stocks are all in different industries, it is unlikely that a problem in one company will affect the other two companies.

Teenvestors find it hard to diversify because they have very little money to invest with. Nevertheless, it is important to know the value of not putting all your eggs in one basket if you ever get enough cash to spread your investment around to different stocks. If you are forced to invest in just one or two stocks, you then have to make sure that the stocks are as safe as possible.