No matter which stocks/shares in any type of investment you have, it is never 100% risk free. You can’t be sure of a guaranteed profit or return on investment. Share prices move up and down consistently all day long and this can lead to uncertainty about the stock. These movements of prices are almost always the faults of one or two of the following factors:
Stock Market Risk: Also known as systematic risk, this risk is unavoidable and usually affects the most important stock exchange indices at the same time. The reasons for market risk may vary; it could be due to changes in the national economy such as GDP growth, unemployment predictions, interest rate and inflation. The government could also influence this risk by changing tax rules etc. Stock market risk cannot be predicted and is therefore inevitable to occur; almost every investor and company has to deal with it.
Investment Specific Risk: Also known as unsystematic risk, this risk can be minimized. It is hardly affected by the national economy or political factors such as stock market risk but can be attributed by several other factors:
– Borrowing costs of a company change as a result of changes to the credit rating
– Threat of new and possible better competitors in the market
– Existing business processes or products becoming outdated caused by technological improvements
To avoid or minimize this risk, make sure to hold a diversified portfolio since different companies usually respond differently to identical changes. If you invest in companies that intentionally shift in opposite directions by the same events, you can lower the investment specific risk and instability in your portfolio.
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