Unsystematic risk means the risk that comes from problems in one company or a single sector. This type of risk does not affect the entire stock market. For example, if one company performs badly due to poor decisions, it only affects that company’s share price. You can reduce this type of risk by investing in many different companies and sectors. This method is called diversification, and it helps protect your money.

What Is Unsystematic Risk in Simple Words?

Unsystematic risk is the risk that is related to just one company or a specific industry. This can happen because of internal problems like bad management, low sales, labour strikes, product recalls, or even fraud. If such issues happen in a company, its stock price may go down. But this doesn’t affect the overall stock market. That’s why unsystematic risk is also called company-specific or business risk. The good news is that you can easily reduce this risk by investing in different companies.

What Are Some Examples of Unsystematic Risk?

Here are some common examples of unsystematic risk:

• A company's CEO suddenly quits, and the stock price falls.
• A company’s product fails in the market, leading to poor sales.
• A workers’ strike stops production for several days or weeks.
• The company faces a legal case or fraud investigation.
• The business loses a major contract or client.

All these problems affect only that particular company or industry. If you have invested only in that company, you may lose money. But if your money is spread out in other companies too, then the loss will be less.

How Is Unsystematic Risk Different from Market Risk?

Unsystematic risk affects only one company or sector. It happens because of reasons that are limited to that business, like poor management or falling profits.

Market risk (also called systematic risk) affects the entire market. It happens due to bigger reasons like economic slowdown, changes in interest rates, inflation, war, or political changes. These risks affect all companies, not just one.

You cannot avoid market risk completely. But you can avoid unsystematic risk by diversifying your portfolio and not putting all your money in one company.

How Can You Reduce Unsystematic Risk Easily?

The best and easiest way to reduce unsystematic risk is by diversification. This means you should invest in many different companies from different industries. For example, you can put your money in banking, IT, pharma, and FMCG companies. So even if one company fails, your other investments will still be safe.

You can also invest in mutual funds. In a mutual fund, your money is automatically spread across many stocks. This lowers your risk without you doing much research.

Also, stay updated about the companies you invest in. If you hear any bad news or signs of poor performance, you can shift your investment on time.

Why Is It Important to Know About Unsystematic Risk?

Many people lose money in the stock market because they invest in just one or two companies. If those companies face problems, they lose a lot. Knowing about unsystematic risk helps you avoid such losses.

It also helps you become a smart investor. When you understand different types of risks, you can plan better. You can choose safe and balanced options, and grow your money over time with less tension.

So, always check where you are investing and how much risk is there. Avoid depending on just one company for your returns.

How to Invest Smartly to Avoid This Risk?

Here are simple tips to invest smartly and avoid unsystematic risk:

• Don’t invest all your money in one company or sector.
• Choose stocks from different industries.
• Invest in mutual funds to get instant diversification.
• Keep checking company news and performance regularly.
• Set clear goals and invest according to your risk level.

By following these tips, you can reduce losses and grow your money in a safe and steady way.