Definition
Spreading money across many investments so no single failure can sink you. Owning thousands of companies through an index fund is diversification working at full strength.
Why it matters
Any single company can go to zero; the whole market never has. Diversification is the only free lunch in investing: less risk without a matching cut in expected return.
Example
An employee holding most of their wealth in company stock watches a bad quarter cut their net worth by a third. A total-market fund holder barely notices the same company's stumble among thousands of positions.
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.