Unsystematic risk is company based risks in which the complete marketplace is not involved and not affected too. This type or risk happens within the company or with people who are directly linked with that firm. Also there are various options by which we can diversify the effects of risk and damages due to unsystematic risks. And the most common example to diversify the effects is with a strong portfolio.
Also, Stock market crash is a systematic risk because this risk comes in complete system and with which the complete market places affected and involved in this. But people thinks that stock market crash is an unsystematic risk and this is false.
Unsystematic risk example
Now try to understand the meaning and working of unsystematic risk with this simple example. Suppose, you have bought some shares from any company and after few days or weeks all the works in that company goes down on strike and due to this harsh affect the demand of that company’s shares going down and your money is in trouble. This is called unsystematic risk. Because here not complete marketplace is involved and affected due to this. But only the parent company and direct linked persons like you are affected.
Unsystematic risks are challenging because here you need to solve things personally and whole marketplace is not giving any kind of support to you. But in comparison, systematic risks are huge in nature and uncontrollable. Later in this article we will discuss about how to diversify unsystematic risk.
After getting deep in this topic, people often asks about can unsystematic risk be eliminated? And the best to get away from unsystematic risk is to buy small amount of shares from different companies so that unsystematic risk can’t affect you much. Because if you got some loss due to this risk in some of your invested money then you can recover them from another source.
But if you’ve invested all your money at one place, then you can be attached by both systematic and unsystematic risk. So plan like pro and then lose your wallet.
Unsystematic risks are not relevant because as explained in above example, they are not technically in plan of working but appears due to certain reason. And we can only fix those reasons only after appearing.
How unsystematic risk can be managed?
All kind of unsystematic risk can be diversified. Industry specific risk or company specific risk are diversified with the help of strong portfolio and we can manage the effects of losses and risks due to unsystematic reasons.
There are different sectors which are most affected by unsystematic risk that are banking, aviation, FMCG, insurance and real estate. And a proper portfolio can deal with this risks.