Lesson 5 of 6 · 9 min
Risk, position size and diversification
Never let one company decide your financial future.
Any single company can fail — even famous ones. Diversification spreads money across many companies and sectors so no single loss is devastating.
A common beginner guideline is to keep any one stock to a small share of your portfolio and to hold broad index funds as a core.
Position sizing means deciding how much you're willing to lose on a trade first, then sizing the trade to match.
Diagram
Trade example · Single stock vs. index
A concentrated bet vs. a diversified portfolio
Two investors each start with $10,000. One stock in the hypothetical example falls 60%.
- Investor A: 100% in one stock
- −60% → $4,000
- Investor B: 70% index fund
- $7,000 (flat) → $7,000
- Investor B: 5 stocks × $600
- one falls 60% → $2,640
- Investor B total
- $9,640 (−3.6%)
The same bad company cost Investor A 60% and Investor B under 4%.
Diversification reduces — but does not remove — risk.
Prices are rounded examples for teaching, not live quotes or recommendations to buy or sell.
Key takeaways
- Single stocks can fall sharply.
- Index funds give instant diversification.
- Size positions by how much you can afford to lose.
Knowledge check
What is the main purpose of diversification?
DisclaimerMoor Capital provides financial education and informational tools. Content is not individualized investment, legal, tax, credit-repair, or financial advice. Investing involves risk, including possible loss of principal.