by: kkelley
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Failure to diversify a client's portfolio can be a form of stock fraud. In order to protect a client's assets, the broker should vary the types of stock purchased. Stock fraud through over concentration strips the client of the protection diversification affords. Diversification of investment holdings is the most important shield against risk. Since some investments rise in value while others fall, diversification smoothes out some of the volatility of the overall return from a portfolio. Diversification may sacrifice some of the upside potential, but should be more than offset by the benefits of lower levels of risk. Diversification is a strategy for managing a customer portfolio to limit risk. Instead of all the investments being concentrated in one market sector, investments are diversified among a variety of industry sectors and types of security. Therefore, as it is less likely that all of the major sectors or specific types will be hit with a significant downturn at once the portfolio contains less risk. It is a broker's responsibility to advise clients to diversify their portfolio to reduce risk. Proper diversification is the foremost issue in all-efficient investments, especially when individual stocks are purchased. When an investment portfolio or account is over concentrated in a particular security, type of security, or industry sector, the risk of loss in the account is increased. The broker has a duty to explain the increased risk and to recommend actions to correct the problem. Over concentration in an account that contains only one individual investment is easy to recognize. Accounts may also be over concentrated if they: * Contain only common stocks (including mutual funds that invest in common stocks) rather than a mix of common stocks, preferred stocks, and debt instruments (bonds). * Contain investments that are limited to one particular industry (such as telecommunications) or industry sector (such as health care or finance). Brokers are obligated to carefully evaluate each client's investment goals to provide for adequate portfolio diversification and not give up potential returns. If a broker places the vast majority of a client's total investment holdings in one sector, and this sector declines significantly, the broker may be liable. All investors are unique, and careful strategies must be employed to properly diversify a client portfolio. Failure to do so can result in negligence and malpractice liability when that portfolio sustains significant losses. The cause of action for negligence or malpractice is based upon the duty owed by the broker to the customer and the breach of that duty, including the duty to exercise due care in connection with the account. Even if the broker did not have actual knowledge as to the falsity of statements that they made, the activity may constitute negligent misrepresentations. Failing to properly diversify the customer's account may also be considered negligent management of an account. In general, reports have shown that: * Smaller companies typically have higher risk of failure. * Smaller-company stocks generally experience a greater degree of market volatility. * Foreign securities have additional risks. * Emerging markets typically have higher risk because they are underdeveloped markets. The right level of diversification for a client depends upon a variety of factors, including the individual's financial position and long and short term financial goals, and how the market is performing. Many portfolios are not properly diversified and therefore an extended risk is being taken.

About the Author

LegalView offers more information on failure to diversify at http://diversify.legalview.com, or use the LegalView homepage at http://www.LegalView.com to find the latest on the Digitek digoxin recall. Or learn about a common and preventable birth defect known as Erb's Palsy.

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<h1>Failure to Diversify or Over Concentrate a Portfolio Could Be Fraud</h1><br><br> <br><br> Failure to diversify a client's portfolio can be a form of stock fraud. In order to protect a client's assets, the broker should vary the types of stock purchased. Stock fraud through over concentration strips the client of the protection diversification affords. Diversification of investment holdings is the most important shield against risk. Since some investments rise in value while others fall, diversification smoothes out some of the volatility of the overall return from a portfolio. Diversification may sacrifice some of the upside potential, but should be more than offset by the benefits of lower levels of risk. Diversification is a strategy for managing a customer portfolio to limit risk. Instead of all the investments being concentrated in one market sector, investments are diversified among a variety of industry sectors and types of security. Therefore, as it is less likely that all of the major sectors or specific types will be hit with a significant downturn at once the portfolio contains less risk. It is a broker's responsibility to advise clients to diversify their portfolio to reduce risk. Proper diversification is the foremost issue in all-efficient investments, especially when individual stocks are purchased. When an investment portfolio or account is over concentrated in a particular security, type of security, or industry sector, the risk of loss in the account is increased. The broker has a duty to explain the increased risk and to recommend actions to correct the problem. Over concentration in an account that contains only one individual investment is easy to recognize. Accounts may also be over concentrated if they: * Contain only common stocks (including mutual funds that invest in common stocks) rather than a mix of common stocks, preferred stocks, and debt instruments (bonds). * Contain investments that are limited to one particular industry (such as telecommunications) or industry sector (such as health care or finance). Brokers are obligated to carefully evaluate each client's investment goals to provide for adequate portfolio diversification and not give up potential returns. If a broker places the vast majority of a client's total investment holdings in one sector, and this sector declines significantly, the broker may be liable. All investors are unique, and careful strategies must be employed to properly diversify a client portfolio. Failure to do so can result in negligence and malpractice liability when that portfolio sustains significant losses. The cause of action for negligence or malpractice is based upon the duty owed by the broker to the customer and the breach of that duty, including the duty to exercise due care in connection with the account. Even if the broker did not have actual knowledge as to the falsity of statements that they made, the activity may constitute negligent misrepresentations. Failing to properly diversify the customer's account may also be considered negligent management of an account. In general, reports have shown that: * Smaller companies typically have higher risk of failure. * Smaller-company stocks generally experience a greater degree of market volatility. * Foreign securities have additional risks. * Emerging markets typically have higher risk because they are underdeveloped markets. The right level of diversification for a client depends upon a variety of factors, including the individual's financial position and long and short term financial goals, and how the market is performing. Many portfolios are not properly diversified and therefore an extended risk is being taken.<br><br> <h3>About The Author</h3> LegalView offers more information on failure to diversify at http://diversify.legalview.com, or use the LegalView homepage at http://www.LegalView.com to find the latest on the Digitek digoxin recall. Or learn about a common and preventable birth defect known as Erb's Palsy.<br><br> Keywords: <b>securities law, over concentration, Failure to Diversify, stock fraud, diversification, over-concent</b> <br><br>Article Source : <a href="http://americanahost.com/articles"><b>Articles Directory</b></a></br> Article URL : <a href="http://americanahost.com/articles/finance/failure-to-diversify-or-over-concentrate-a-portfolio-could-be-fraud.html" target=_blank>Failure to Diversify or Over Concentrate a Portfolio Could Be Fraud</a></br> Article Category : <a href="http://americanahost.com/articles/finance/">Finance</a></br> Article Author : <a href="http://americanahost.com/articles/profile/kkelley-2081.html">kkelley</a>

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Article URL : Failure to Diversify or Over Concentrate a Portfolio Could Be Fraud
Article Category : Finance
Article Author : kkelley