Established blue chip companies, for example, provide a greater margin of safety than do small start-up companies. Blue chip corporations often occupy leading market positions that are expected to be maintained or enhanced. This is because there is a large, liquid market for their shares, and normally a longer history of earnings and dividend growth. Emerging growth stocks can be among the riskiest of all since they are shares of fledgling companies still in their developing stages, with hopes of superior earnings growth over time. Some of these companies will make it, but others will fall by the wayside.
Foreign stocks carry the additional risk of currency fluctuation.
For example, if U.S. investors put money in European stocks and those currencies decline in relation to the dollar, the falling foreign currencies can reduce an investor's profits or add to losses. Investors attempting to go it alone run the risk of not doing their homework as thoroughly as professional analysts. Many investors reduce risk by diversifying their assets. Mutual funds themselves are a form of diversification since they invest in a broad variety of securities sometimes encompassing many different industries and types of stocks. However, investors building their own portfolios can also diversify by searching for stocks in different sectors, choosing among various types of stocks, and adding an international component to their holdings.