Systematic and Unsystematic risk in the Stock market – Explained
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There are various kinds of share market risks (stock market liquidity, stock price volatility, legal, inflation, regulatory, and so on) that a person must mitigate in a securities market. However, these risks can be broadly classified into two categories i.e. Systematic risk and Unsystematic risk. Risk can be defined as future uncertainty or deviation of movements which can result in loss/downfall in your investments.  You must always measure the risk you, as an investor, are willing to take in order to gain the expected return. There are various tools and parameters which help you minimize the returns and maximize the returns on your portfolio. Let’s discuss the two types of risks and ways to mitigate them.

 

Unsystematic Risk (Non-market risk)

This type of risk, unsystematic risk, arises from within the company or from the industry in which the company belongs. The good part is that we can minimize unsystematic risk from our portfolio by appropriate risk management. In order to minimize the risk, we must diversify our portfolio in such a manner which eliminates the risk from any sector or company. The asset diversification is very important; hence, we must choose assets which are negatively co-related to each other.

Let’s take an example – Suppose an investor has invested in an oil company, and he is afraid that the falling oil prices will impact his portfolio tremendously. To mitigate this risk, one should choose a company which will benefit from falling oil prices. The automobile sector or Airline industry seem to gain a positive impact from this forecast. So, you should invest in one of the companies which are like your oil company (in terms of Size, countries of business operation, management style, etc). This kind of diversification and risk-minimizing strategy will help you reduce your risk exposure and stabilize your increasing portfolio growth.

Systematic Risk (Market risk)

This risk type is unpredictable and hence, undiversifiable. This risk affects the overall market and there’s no particular way to mitigate the risk. One of the examples of systematic risk can be the 2008 financial crisis. The source of systematic risk is the market or global factors which cannot be considered beforehand.
Derivatives like call/put options do give you creative ways to hedge the portfolio but that is a lesson for some other article!

Thankfully, with the use of appropriate risk metric tools, it is possible to bifurcate systematic and unsystematic risks of any portfolio or stock.  To know how to use several risk metrics, consult here.

About Hindustan Tradecom

Established in the year 2005, Hindustan Tradecom Group started its operations with an objective of becoming a financial powerhouse providing a complete range of financial solutions – all under one roof – with dedicated customer service and commitment to providing value for money to the clients.

We are leading share broker, Stockbroker and Commodity broker in Jaipur, Jodhpur, Bikaner, Kota, Rajasthan, India. If you are looking to minimize the risk in the stock market then get in touch with our team at 0141-4069600 or visit our website htplonline.com.