Posted in Finance, Accounting and Economics Terms, Total Reads: 290
Definition: Company Risk
Company Risk is uncertain future faced by an investor who holds securities/stocks/bonds in a company is called company risk. There are certain factors which may affect a specific company and may cause the market price of its stock to change in a different way from the stocks as a whole of the same industry and environment.
Factors like changes in customer demand can cause a firm's stock price to come up or down as more demand would mean less risk while less demand means more risk on the side of the shareholder.
For example let us consider a company selling a really large fraction of its output to foreign customers. Its profits and stock price would be subject to certain factors, such as fluctuations in foreign exchange rates which would be less important for other companies in the same sector. We can also consider the possibility of a strike by a company's employees in case it is a huge manufacturing company with labour unions.
One of the best ways to mitigate company risk is by diversifying the portfolio, that is, by purchasing stocks in additional companies and assets which are not correlated. By doing this, shareholders can minimize their portfolio's exposure to the fluctuations of a single company's performance. For example, an oil company has the company risk that in a particular financial year the firm drills very little to no oil at all. An investor should be ready to foresee this and mitigate this risk by investing in several different oil companies.
It can be safely assumed that risk is an inseparable part of achieving gains from investments, but the level of risk undertaken can be carefully handled and tailored according to each investor's time-period limit, amount of tolerance for the risk and expected rate of return.