Every investment has risk. Therefore, you should understand the different types of investment risk and how they affect different investments and portfolios.

Investment risk is broken down into two types of risk:
A. Company Risk: This risk can be diversified.
B. Market Risk: This risk cannot be diversified.

The total investment risk is equal to the sum of the two risks:

Total Investment Risk = Company Risk (A) + Market Risk (B)

What is Company Risk?
This risk refers to factors affecting the price of a company's securities, such as management skill, labour relations, consumer preferences and other unique factors. Company risk is diversifiable, since the risk of each security in a portfolio can be reduced through increasing the number of securities. With many securities in a portfolio, a reduced price in one security (due to poor company performance) may be offset by an increase price of another security in the portfolio.

Tip: To reduce company risk: Increase the number of different securities in your portfolio. For example, you can dramatically reduce your company risk by buying an equity mutual fund rather than a single stock.

What is Market Risk?
Market risk refers to those factors that affect financial market returns as a whole, such as a major increase in interest rates, a long war or an outbreak of an infectious disease. Market risk is present in all financial markets, including the money market, bond market, stock market and currency market. Market risk is common to all portfolios with securities from these particular markets. For example, market risk is present in nearly all stocks in the market since stock prices generally move together in the same direction.

Tip: To reduce market risk: It is difficult to reduce market risk since increasing the number of different securities will not decrease market risk. The best way to reduce your aggregate market risk is by investing in many different markets such as the money market, bond market and stock market. The simple and powerful diversification concept is called asset allocation.