What Is Company Risk?
Company risk is the financial uncertainty faced by an investor who holds securities in a specific firm. It’s also called company-specific risk, unsystematic risk, and diversifiable risk. The risk of owning a company can be mitigated through investing strategies such as diversification and purchasing securities or assets that are uncorrelated.
- Company risk is also known as unsystematic risk, which is a risk that can be diversified away by owning enough stocks or assets.
- Company risk is any risk, such as increased regulation or competition, that could affect the profitability or solvency of a company.
- Company risk is unlike systematic risk, which is the market risk that affects all stocks and cannot be diversified away,
Understanding Company Risk
Company risk is the risk that certain factors, whether internal or external, will affect a company. This includes changes in a company’s products or financial position that could negatively impact a company’s stock price. Investors can proactively limit a portfolio's exposure to the ups and downs of a single company's performance.
Systematic vs. Unsystematic Risks
While unsystematic risk is the company-specific risk, systematic risk is the uncertainty associated with investing in the broader market. It cannot be diversified away because it affects all the securities in the market. Major political and economic events such as wars and recessions are examples of events that pose a systematic risk. Investors can reduce their exposure to systematic risk through hedging.
While risk is an essential part of achieving higher levels of investment gains, the amount of risk undertaken can be managed and customized to each investor's timeframe, required rate of return and risk tolerance.
Types of Company Risks
There are many types of firm-specific risks that could affect the potential profitability or even the solvency of a company. This can include such things as regulation changes that hurt a company or a forced recall. As well, new competitors and fraud can also pose a risk,
There are also certain financial risks with how a company handles money. A company may be affected positively or negatively by changes in the rates at which they can borrow and how much debt they carry on the books. A firm may also be overly-reliant on growing revenue from a small or key group of clients.
A company also has to be careful with public relations risks to its reputation. An influencer may one day be raving about a product and, the next day, lead a boycott over its usage. A published study or government regulator may list a company's product as unsafe or flawed risking the reputation of the business to make quality goods.
Operational risks can result from unforeseen and/or negligent events such as a breakdown in the supply chain or a critical error being overlooked in the manufacturing process. A security breach could expose confidential information about customers or other types of key proprietary data to criminals.
A strategic risk may occur if a business gets stuck selling goods or services in a dying industry without a solid plan to evolve the company's offerings. A company may also encounter this risk by entering into a flawed partnership with another firm or competitor that hurts their future prospects for growth.
Legal and regulatory risks can expose a company to a myriad of liabilities and potential lawsuits from customers, suppliers and competing firms. Enforcement actions from government agencies and changes in laws can also be difficult to guard against.