How does market risk differ from specific risk?

The effect on assets is determined by market and specific risks. To avoid serious financial losses when working with securities, it is necessary to clearly understand what their differences and similarities are. Investment assets are divided into two categories of risks.

  1. Systemic.
  2. Haphazard.

A huge number of asset classes directly depend on market specific risks. A specific risk is reflected only in the work of industries or certain companies, firms, divisions.

Characteristics and features

Market risk cannot be reduced with portfolio diversification. But the investor is able to insure against systematic risk. Hedging compensates potential losses on investments in volatile assets. By buying put options the investor reduces the risks of a market subsidence due to a global recession or a slight increase in gross product in the next half year if he has multiple shares.

A specific risk is diversified in case of unexpected dangers in a particular industry or company. An investor investing in various assets easily reduces the risk by mitigating the possible negative consequences of market fluctuations in securities. If necessary, you can easily use the beta version of each stock by creating new portfolios.

Using diversification, you can easily distribute your funds in different sectors that have a negative correction in relation to fixed investments in order to minimize losses from the drawdown of securities. For example, the value of shares in oil companies can be compensated by investing in the purchase of shares in casinos or air carriers. In this case, any market changes will always be smoothed, bringing a stable income.

Knowing exactly your capabilities, correcting risks and well understanding the movement of securities, you can conduct instant, short-term transactions to quickly get maximum profit. Having the tools to create current charts in the hands of the trader without any problems monitors the slightest changes and, based on his experience, can instantly carry out transactions in a short period of time.

Using securities, investors can easily quickly increase fixed assets due to their ability to respond to market movements. Beta versions of stocks are always equal to 1, and the portfolio is more volatile than the market. When the market fluctuates by one percent, the portfolio rises or falls in price by two percent. This allows you to more confidently adjust the price jumps when buying or selling shares of other companies.