Difference between Systematic and Unsystematic Risk
While investing in a stock market one need to take into account two types of risks one is systematic and other is unsystematic risk. Let’s look at the difference between the two of them –
Systematic risk refers to the risk which affects the whole stock market and therefore it cannot be reduced or diversified away. For example any global turmoil will affect the whole stock market and not any single stock, similarly any change in the interest rates affect the whole market though some sectors are more affected then others. This type of risk is called non diversifiable risk because no amount of diversification can reduce this risk.;
Unsystematic risk is the extent of variability in the stock or security’s return on account of factors which are unique to a company. For example it may be possible that management of a company may be poor, or there may be strike of workers which leads to losses. Since these factors affect only one company, this type of risk can be diversified away by investing in more than one company because each company is different and therefore this risk is also called diversifiable risk.