Diversification Principle to Increase Cash Flow Position - Essay Example

Investors that are risk-averse will invest a lot of their resources in common stocks due to the fact that common stocks have a higher potential for equity appreciation. Investors that do not apply the diversification principle can lose a lot of money if the particular sector of the market they invest in goes down. It is never a wise idea for investors to place all their eggs in the same basket. Diversification ensures that investors spread their securities around different sectors of the market.

            Managers can utilize the diversification principle to increase their cash flow position. A way to use investing to increase cash flows is by purchasing blue-chip stocks that have a history of paying dividends every year. Another way for managers to improve the cash position of a company is by investing in bonds that pay coupon payments and in preferred stocks that pay yearly dividends. Firms may also improve their cash flow position by selling commercial paper in the marketplace. The most common form of commercial paper is corporate bonds. “The right diversification strategy can give you the best odds of weathering whatever economic storms may hit the market in the future” (Caplinger, 2012).