When you own only one or two shares, your outcome depends entirely on those companies. If one runs into trouble, your savings suffer badly. By holding a mix of different companies, industries and even asset types, the poor performance of one holding can be offset by the steadier performance of others, and the overall result tends to be a smoother ride with less extreme swings.
Diversification works because different investments rarely move in perfect step. When some are falling, others may be flat or rising, which cushions the total value of your portfolio. It does not remove risk entirely, and it will not protect you from a broad market decline where almost everything falls together, but it is one of the few reliable ways to reduce the risk that comes from betting too heavily on a single outcome.
In practice, diversification can mean holding shares across several sectors and countries, or combining shares with other asset classes such as bonds. Many investors achieve broad diversification simply by holding funds that pool together hundreds or thousands of individual holdings, rather than trying to buy each one themselves.
This content is general information, not investment advice.