Small-Capital Retail Diversification Suitability
A novice investor with $3,000 in savings wants to begin investing in equities for long-term growth. She asks to invest the entire $3,000 into a single high-profile technology stock. Why should the representative recommend a broad-market mutual fund or ETF instead?
A single company exposes an investor to catastrophic non-systematic (unsystematic) risk. For small accounts, an open-end fund or ETF achieves instant diversification across multiple sectors.
Complete Analysis & Legal Rationale
Concentration of capital in one stock can result in severe loss if that business stumbles. Broad index funds eliminate unsystematic business risk, leaving only systematic market risk.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Accurately highlights the elimination of unsystematic risk through fund diversification.
There is no minimum regulatory dollar threshold for buying individual shares.
Mutual funds carry market risk and never guarantee positive returns.
Single stocks can freely be bought in standard cash accounts.