Diversification
In one sentenceSpreading investment across different assets and sectors that do not move together, so the big loss that could come from a single asset is reduced without the return disappearing.
Simply put
The idea is old: don't put all your eggs in one basket. If one investment in a diversified portfolio struggles, its effect is limited.
Diversification reduces the risks specific to each company, but it does not protect against risks that hit the whole market, such as a general recession.
Worked example
An investor has 1,000,000 SAR. In the first case he put it in a single stock, and in the second he spread it equally across 10 stocks. One of the stocks fell 40% and the rest stayed the same.
Investing in a single stock1,000,000 × 40% = 400,000 SAR loss
The stock's share in the diversified portfolio1,000,000 ÷ 10 = 100,000 SAR
Loss of the diversified portfolio = 100,000 × 40%40,000 SAR
Don't confuse it with
Systematic riskThe risk of the whole market, which diversification does not remove.