Diversification

Definition

In accounting, diversification helps spread investments or assets across different types, sectors, or markets to reduce risk. The thing is, by “not putting all your eggs in one basket,” a business can protect itself from potential losses if one area underperforms.

Why it matters

Diversification is a safeguard against the unpredictability of markets and investments. For instance, if a business only invests in one type of asset, it’s highly exposed if that asset’s value drops. By diversifying investments—such as holding a mix of stocks, bonds, or assets across industries—a business can cushion the blow from any single loss and stabilize overall returns.