What is systematic risk and unsystematic risk? These two terms are used in financial markets and are among the most used terms among traders and traders. Risk generally means Probability of failure It is in a task and when we say that the risk of a task is high, it means that there is a high probability that we will not succeed in that task. If you are a trader and work in the financial markets, you are constantly taking risks and may not succeed in trading. In fact, the risks that you face in the financial markets are divided into two categories of systemic and non-systemic risks, which we intend to introduce in full in this article.
What is systematic risk?
Systematic risks are not only related to one transaction, but actually involve the entire market. Systematic risk is also known as unavoidable risk because you cannot predict it and you cannot eliminate it. When speaking of Unavoidable risk It is possible, that is, there is a risk in front of you that covers all the market and stock companies and rules over them.
Most traders use asset specialization solutions and strategies in order to reduce the unavoidable effects of risk. In fact, with this method, those who are active in the market participate in the bonds of companies so that they can cover part of the capital.
Systematic risk and factors affecting it
There are various influential factors that can increase the probability of systematic risk and increase it. In each country, depending on its policies and economic position, the amount of this type of risk is low or high. For example, a country that has suffered various sanctions or is constantly at war with other countries has a higher systematic risk in its capital market, but on the other hand, a country that is not threatened by any of these problems has a lower risk and investing in its markets seems more reasonable.
The relationship between beta coefficient and systematic risk
In the occurrence of systematic risk, none of the companies or investors have a role, and this risk usually arises based on big problems such as sanctions, etc. In order to help traders identify and manage unavoidable risks, market experts provide a solution as Beta coefficient they presented. In fact, with this method, every stock in the financial market has a beta coefficient, and the trader must calculate the value of the beta coefficient before entering it, so as not to have problems related to systematic risk.
During traders’ calculations, if the value of the beta coefficient was higher than 1, it means that you should not enter that stock because systematic risk threatens the financial market and the same stock; But if it was less than one, traders can safely enter the stock market and trade.
Example for systematic risk
Now, in order for you to become more familiar with this type of risk, we will give an example. As you must have noticed by now, systematic risks have a direct relationship with the economic and political situation of the countries, and even the smallest interference between the two countries causes this risk to occur. We are all aware of the political problems between the United States and Iran. When the United States puts pressure on Iran politically, the effects of these pressures can be seen on the financial market of Iran, and this is an example of systematic risk. At this time, the possibility of such a risk increases, and for this reason, we suggest not to enter the financial market at such times.
What is unsystematic risk?
Now that we have fully talked about systematic risk, it is time for unsystematic risk. In this type of risk, traders should completely focus their attention on companies and stocks and instead of the market as a whole, pay attention to the details of the companies and consider their systemic changes so that they can identify and prevent this type of risk.
In unsystematic risks, the actions of stock and property companies become highly important so that their smallest actions may increase the effect of this type of risk.
Types of unsystematic risk
There are different types of unsystematic risks, each of which is explained below:
- Business Risk: Business risks occur both inside and outside of a business.
- Financial risk: In financial risk, the amount of property and rights of companies should always be maintained at an optimal level, otherwise, due to the weak structure of the company’s financial flows, financial risks will also arise.
- Operational risk: sometimes there are events that put a company at risk, or damage it, or generally lead to the dissolution of the company. For example, let’s assume that the customer information of a certain company is hacked and this issue has an adverse effect on the main company.
- Legal-regulatory risk: sometimes there are laws that cause the dissolution of a business as a whole or cause a lot of damage to it, and these risks are called legal and regulatory risks.
An example of unsystematic risk
Unsystematic risks in the capital market, as we said, have a direct relationship with the actions of companies and what happens around them. For example, suppose the employees of a company go on strike and no longer work for it, which increases the risk of unsystematic risk. Or if we want to give another example, let’s say that a company produces a poor quality product and none of the customers are willing to buy this product, in such a time unsystematic risk arises and you have to be careful about it.
How to reduce unsystematic risk?
But what is the way to eliminate unsystematic risk? In order not to fall into the trap of such a risk and not to lose all your capital, we suggest that instead of investing in one asset, you should inject it between several different assets. Even though the probability of this ricks is less and even if it occurs, because you have not invested all your capital in just one asset, your capital is not at risk and you lose less.
To reduce unsystematic risk, we suggest you to go for investment portfolios, of course, keep in mind that investment portfolios are threatened by systematic risks and if such risks occur, then your assets in these portfolios will also be at risk.
The difference between systematic and unsystematic risk
Up to this point in the article, you have become familiar with the concept of systemic and non-systemic risks and you must have understood their difference. In a comprehensive definition of the difference between these two risks, it can be said that systematic risks cover the entire market and no investment can escape from it, but unlike this type of risk, in unsystematic risks, usually external factors do not affect the occurrence of risk and this Risk arises through the actions that the owner of the stock company takes or, in general, the events that happen inside the companies themselves. Also, in unsystematic risk, only one share is threatened and the rest of the shares are not included in this risk.
Systematic risks are unavoidable, while unsystematic risks can be removed and eliminated. Unavoidable risks, because they affect the entire market, are usually not removed and cannot be greatly affected, but on the other hand, it is possible to do this for unsystematic risks.
Systematic and unsystematic risk, what is the solution?
Risk may always arise in the financial markets, and for this reason, you should be constantly informed about the daily news of the financial markets and be aware of the companies you have invested your assets in, and update your information every day. By considering the types of systematic risk and unsystematic risk and managing them, you can maintain the value of your capital portfolio and even increase this value. But if these risks are not managed, they can even destroy all your assets and capital and cause irreparable damage to you. It is better to thoroughly research a company and the financial market before taking a risk and do your investing with an open mind.
What is systematic risk and unsystematic risk in financial markets? The first time in the blog Valx. appeared.
