Glossary Diversification

Diversification

Definition of Diversification

Diversification is the act of investing in more than one asset class, sector, industry, or country to mitigate risk. It is an investment strategy designed to reduce risk by pairing a volatile asset class like equities with a fixed income asset class like fixed deposits. Or, by investing in equities in one country and complementing it by investing a portfolio in stocks from another country.

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Related Terms

Dividend Payout Ratio

The Dividend Payout Ratio refers to dividends paid to shareholders as a percentage of the net income or Earnings Per Share (EPS) of a company. The formula to calculate dividend payout ratio is:

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Dividend Per Share

Dividend per share indicates the amount of dividends paid as a ratio of the number of shares outstanding. Or, dividend per share could also refer to the product of earnings per share and dividend payout ratio.

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Dividend Reinvestment Plan

A Dividend Reinvestment Plan is a feature where an investor can reinvest the dividends they earn to buy additional shares or units of a mutual fund, either fractional or whole.

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Dividend Stocks

Dividend stocks are shares of companies that redistribute their profits to shareholders in the form of dividends. Such companies are typically industry or sector leaders with stellar reputations and track records.

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Dividend Stripping

Dividend stripping is a strategy of buying a company’s stock days before it announces a dividend and then selling the same stock at a lower price once the current holder is entitled to get the dividend previously announced.

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Dividend Yield

A dividend yield is a ratio of dividends paid per share by the latest share price, expressed as a percentage. It is used to understand how much dividends a company pays per share outstanding. The formula to calculate dividend yields is:

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