In financial lingo, the term "unsystematic" simply refers to a quality that is not commonly shared among many investment opportunities. The most narrow interpretation of an unsystematic risk is a risk unique to the operation of an individual firm. Examples of this can include management risks, location risks and succession risks.
It is not necessarily true that unsystematic risks occur one firm at a time; for example, a terrible manager may only be able to directly affect one firm's stock, but the stocks of many firms might simultaneously suffer from the unsystematic risk of bad management.
It can be in this way that unsystematic risks are identified in broad enough fashion to apply to many different businesses at once. What is important is that an unsystematic risk is not inherent to every security or at least not a great majority of securities. Moreover, investors should be able to diversify away unsystematic risks by strategically targeting a wide enough range of holdings in their respective portfolios.
Another way to identify unsystematic risks is to compare the specific instance of a risk with the overall market or industry. If there is little or no substantial correlation, the risk is likely to be unsystematic.
Common Unsystematic Risks - Bad Entrepreneurship
Most unsystematic risks are related to errors in entrepreneurial judgment. For example, a technology company might perform market research and expect that consumers want smaller cellphones and digital watches the next year. Production lines are altered and capital is devoted toward smaller devices.
After the next year rolls around, consumers actually prefer bigger phones and watches. Much of the existing inventory for the aforementioned technology company either goes unsold or sells at a major loss. This can damage the stock price of the individual firm.
Of course, this risk is always possible among all kinds of firms. What makes it unsystematic is that only a few firms tend make the same mistake at the same time. The whole of the technology sector may end up performing very well during this year; the company with poor entrepreneurial foresight suffers.
Common Unsystematic Risks - Political and Legal Risk
Imagine a sector with three major firms in competition with one another: Firms A, B and C. Each is developing a new type of wind energy. Suppose all of these companies have effective business entrepreneurs at the helm.
However, a state government decides to subsidize Firm A or perhaps it prohibits a practice commonly used by Firms B and C that allegedly harms local bird populations. The stock value for Firm A tends to rise, while the stock value for the other two firms tends to fall.
Neither of these specific political or legal risk are inherent to the industry itself. Their negative effects are spread among select companies only. If an investor purchased stock in all three firms, he may be able to diversify away losses in Firms B and C via the gains from Firm A.
There are some political and legal risks that do affect entire industries in systematic ways, however. It is not always possible to diversify away risks outside of the control of individual managers.