The importance of diversification When investing in stocks, it is very important you know the potential pitfalls. I will highlight 3 areas that could have a big impact on share price performance.
1) client diversification: For instance, some companies rely heavily on a few clients for the majority of their business. Any loss in clients could have a significant impact on top and bottom line. Stay away from these companies no matter how promising it may look.
2) stock ownership: some companies are literally held by a few large institutions and some minor number of retail investors. If the company loses one of its larger institutional investor, then the stock price takes a beating. Bitcoin would be a perfect example of an investment that was being supported by a concentrated number of wealthy investors. There was not enough ownership diversification.
3) geographical diversification : A company has all of their eggs in one basket or one jurisdiction. If there is any policy change or a shift in demographics or local leadership, this could have a significant outcome on corporate earnings. In some cases, it can drive the company to the ground.
If anybody has others, please add them to the list.
Thank you.