Stock diversification: Not just about mitigating risk

When most people think about diversifying their investment portfolio it is out of concern that they will suffer unsustainable losses. This is a valid concern considering the tendency of individual sectors to experience a boom eventually followed by a bust. However, diversification is not just for risk mitigation. It is also a great strategy to quickly grow one’s portfolio.

An initial public offering (IPO) is when a privately-held company first makes it possible for individuals to buy shares. This is one of the riskiest times to purchase a stock because the company has no history of success and there is no way to determine with any degree of certainty that the value of the stock will grow over time. Even if it does eventually grow, there is no way to know if it will be a quick rise or a slow trajectory over a span of decades. That is what makes it so exciting to make this sort of purchase. It is also what increases the risk.

GoPro

Usually, there is a lot of fanfare when a popular company enters the market. This can clearly be seen with an examination of GoPro and Snapchat. If you’ve been following NASDAQ GPRO over the past three years, you know that the initial IPO averaged $24 per share and the current price per share is around $8. In just three short years the stock has fallen, but that doesn’t mean it isn’t a good investment.

Some experts say it has reached market saturation and that it is a great time to sell, while others see it as an opportunity to invest. It’s risky but the company has no debt, is an industry powerhouse, and has a passion for innovation. Anyone who is interested in diversifying to include riskier and potentially more profitable returns should be paying attention to this and keep in mind the initial IPO price the company received.

Snapchat

Snapchat is a more recent example. It is one of the fastest growing social media platforms and is remarkably popular with millennials. In less than a week, the price has exceeded expectations and been used as an example of the instability of IPOs. It is far too soon to see how the market will adapt to the company being made public nor how the change will affect the users. The enthusiastic support of those who use the application indicates it has the potential for growth and the relatively low purchase price makes it a tempting investment.

For example, when Facebook debuted at less than $40 a share most people thought that was a rousing entry but a month later it had dropped to $30 a share. It is now close to $140 a share and continuing to roll out revolutionary industry innovations that promise to facilitate further growth. If Snapchat were to follow the same type of growth pattern, the returns could be substantial.

It is impossible to know for sure which industry will offer the best return on one’s investment, that is why there are experts in each field that urge consumers to invest with them. They key to successful investment lies in diversification. Not only in the industries one invests in, but also in the type of risk. IPOs may offer a greater risk but they also offer the greatest potential of reward. A mixture of proven stocks and IPOs helps to mitigate one’s risk and also maximize one’s earning potential.

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