Do Not Buy Shares Of Just A Single Company
Every investment has its own share of risks. The risk in the stock market can be divided into many kinds. Systematic risks are those that are the risk which is company specific.
Suppose you decide to invest a capital in a particular company. If the company reports some negative numbers then the stock price of the company will fall. This means that had you invested all your money into this very company then your investment value also falls. Learn more about it here how to diversify your portfolio of stocks.
But what happens to this company does not affect its competitors in the market. This means that this risk is very specific to the company and it is not dependent on any other factors but what is happening within the company.
The companies that scammed
In the past, you will come across many companies that had scammed. The company could be inflating its numbers or mishandling its funds and all of a sudden the insider information got busted. What happened then? Just go through history and you will come across many such blue-chip companies that were the hot favorite and because of a scam that got highlighted, the entire company was washed out.
Had you invested in these companies then you would have ended up losing all your trading capital within a few trading sessions.
The stock price after the news falls in complete downward motion and this causes a major loss to those investors who were holding on to the particular company stocks.
However what you observe is that what is happening to the stock prices of the company that has scammed does not affect the other companies that are traded on the exchange. No other stock reacts to this news except the stock itself. Even the index does not fall as much as the share prices of the company fall.
What do you infer out of this?
The drop in the share prices of the company was because of the events that happened in the company. This has got nothing to do with the other companies that are being traded on the exchange. The price was affected by the internal information of the company and this risk of exposing your capital to a single company is known as unsystematic risk.
You can, however, protect yourself from unsystematic risk. This can be done by diversifying your portfolio and holding stocks of various companies in your portfolio.