What is 'Company Risk'

Company risk is the financial uncertainty faced by an investor who holds securities in a specific firm. It can be mitigated through investing strategies such as diversification, and purchasing securities in additional companies and uncorrelated assets. Investors can proactively limit a portfolio's exposure to the ups and downs of a single company's performance.

Company risk is also called "specific risk," "unsystematic risk" or "diversifiable risk."

BREAKING DOWN 'Company Risk'

Systematic risk, on the other hand, refers to the uncertainties 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 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 risk that could affect the potential profitability or even the solvency of a company.

There are 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 their reputation. An influencer may one day be raving about a product, and the next day leading 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.

RELATED TERMS
  1. Market Risk

    Market risk is the possibility of an investor experiencing losses ...
  2. Professional Risk Manager - PRM ...

    Professional risk manager is a designation awarded by the Professional ...
  3. Price Risk

    The risk of a decline in the value of a security or a portfolio. ...
  4. Business Risk

    Business risk is the possibility a company will have lower than ...
  5. Risk Profile

    An evaluation of an individual or organization's willingness ...
  6. Event Risk

    An event risk is the possibility that an unforeseen event will ...
Related Articles
  1. Personal Finance

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
  2. Insights

    How to Invest In Developing Markets

    Developing markets can be attractive additions to many investor's portfolios, but carry additional risks that must be considered.
  3. Investing

    The Risks Associated with Common Investments

    Investing inherently involves some risk. Here are some of the different types of investment risks.
  4. Investing

    Balancing the Different Risks Investors Face

    One of the keys to investing successfully is to balance different types of risk.
  5. Investing

    The Importance Of Diversification

    Diversification is a technique that reduces risk by allocating investments among various financial instruments. Learn how to maximize your return without increasing substantial risk in your portfolio.
  6. Tech

    The Importance of Healthcare Risk Management

    Risk management is especially important in healthcare because human lives might be on the line. Here are some strategies to map out a plan.
  7. Small Business

    Identifying and managing business risks

    Running a business comes with a lot of associated risks, but there are an equal number of ways to prepare for and manage them to lessen their impact.
  8. Investing

    Understanding Risk is Key to Your Investing Strategy

    Here's why considering all types of risk is crucial for a successful investment plan.
  9. Financial Advisor

    Advisors: Incorporating Impact Investing in Client Portfolios

    Impact investing can carry unique risks, but planning for them ahead of time can will help you incorporate these funds in client portfolios.
RELATED FAQS
  1. Financial Risk vs Business Risk

    Understand the key differences between a company's financial risk and its business risk – along with some of the factors ... Read Answer >>
  2. Systemic versus systematic risk: What's the difference?

    Systemic risk generally refers to an event that can trigger a collapse in a certain industry or economy, whereas systematic ... Read Answer >>
  3. What is the difference between risk avoidance and risk reduction?

    Learn what risk avoidance and risk reduction are, what the differences between the two are, and some techniques investors ... Read Answer >>
  4. What are the different sources of business risk?

    Explore the various sources of business risk for companies and learn how critical risk management is to a company's financial ... Read Answer >>
  5. What Are the Components of a Risk Premium?

    Learn the five main risks that comprise the risk premium and how they affect investors. Read Answer >>
Hot Definitions
  1. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center