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.
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.
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