Function

• When a company goes bankrupt, the equity owners (stockholders) lose all the value of their holdings and the debt holders become the new equity owners of the company.
  
  

Features

• An individual stock may have the risk of going bankrupt, but through proper diversification the unsystematic risk, or company-specific risk, can become minimized.
  
  

Benefits

• While an individual company does have the risk of bankruptcy, stocks continue to maintain the status of best-performing asset class over time.
  
  

Warning

• While diversification does minimize unsystematic risk, the systematic risk--or market risk--can still cause a portfolio to incur losses during times of economic hardship.
  
  

Considerations

• History has shown that a portfolio with proper diversification and proper asset allocation can outperform other asset classes over a long-term time horizon.