One of the very common concepts in the financial sector is “diversification”. Usually it is used in relation to improving performance at the end of a certain time period or the end of trading. Also used in relation to risk reduction.
Diversification - the investment of funds in different assets in order to reduce the risk of losses and capital additions.
Basically, this term means developing new markets, changing a trading strategy to a wider category of consumers, or developing new types of production. Usually, the reason for this is the desire to reduce potential risks or gain overtime. The term came from two Latin words: facere (to do) and diversus (different).
Thanks to investing in various industries and areas, the range of services and goods on the market is expanding significantly. Investing in promising areas only strengthens it. At the same time, the separation of capital reduces the risk of losing capital and, consequently, bankruptcy.
But it is important to understand that before investing, it is necessary to conduct a competent analysis of where money will be invested. Otherwise, you can lose more than you gain.
In what cases does diversification apply? One of the main ones: market coverage. For this purpose, several subsidiaries or a network of branches are created at once, thus capturing an impressive part of the market segment. This can be achieved by creating a full-fledged network of suppliers and customers who are self-sufficient. Naturally, projects with maximum liquidity are selected for diversification.
The main reasons for diversification:
1. Bigger profits.
2. Prevention of bankruptcy or decline in production.
3. Preservation of valuable assets during periods of crisis.
When diversifying a business, they try to select the most profitable projects or assets. When demand for one of them begins to decline, it is replaced by another which is more promising.
In the securities market, diversification distributes investments in various financial instruments. For example, new real estate, stocks or precious metals can be acquired. If, for example, a company acquired shares of commercial organizations, then it may begin to purchase bonds of state enterprises.
In the Forex market, first of all, they look towards the purchase of the most promising assets in the nearest future. Under the influence of economic factors (politics, economics, rate movements), assets with a high degree of risk are excluded from the investment portfolio and replaced with other ones that are more profitable.
There are many ways to get productive results from diversification. It all depends on the specific task and strategy.
There are two main ways to diversify production:
• Expansion of own production. It is used, as a rule, due to a lack in finances.
• Acquisition of third-party assets . Less profitable, but simpler option. The purchase of ready-made assets allows you to immediately put them into operation.
Also, there are several basic methods for effective diversification of investments.
• Release of products of a new category, different from the existing assortment. Thus increases the interchangeability of different types of goods.
• Competent construction of a management system and long-term distribution of funds.
• Simultaneous launch of production of completely different types of assets, which automatically increases market presence in several sectors at once.
• Choice of investment portfolio with the possibility of complete interchangeability of assets. When the liquidity of one falls, the liquidity of the other automatically increases.
Markets do not stand still and are constantly changing. Because of this, diversification is becoming more complicated. Entire strategies are being developed to adapt to an ever-changing market and asset liquidity.
Among the whole variety of applied strategies, several can be noted.
• Horizontal - expansion of the product range in other regions, that is, geographical expansion and market capture.
• Vertical - the introduction of new techniques into an existing production system.
• Centered - a characteristically new type of product is produced that is not related to an existing one, at its own facilities.
• Conglomerate (secondary) - third-party production is purchased (in the status of a subsidiary) and production of new products is launched at acquired capacities. Considered a high-risk strategy.
There are many subspecies of these strategies, including some rather unusual ones. But, despite this, it will be much more convenient and profitable to create your own strategy based on individual preferences and market realities.
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