The stock market is made up of thousands of common and preferred stocks. The collective price action of each of these individual stocks determines whether the market is up or down. Is bull (rising) or bear (declining).

Stock prices change constantly, because investors are continuously re-evaluating their opinion of, and therefore the price of, each individual company. This relentless re-assessment, combined with the nature of business itself creates substantial risk. Business can be an extremely profitable endeavor, but it is not for the feint of heart. With millions, often billions, of dollars in annual revenue at stake, the business community most definitely plays hard ball. Some businesses are immensely successful and others are not. This simple economic truth spells risk for anyone trying to pick the winners.

The stock price of each individual company is subject to many different kinds of business and financial risk. However, from a investment management point of view, we can divide these risks into two broad categories:

	Risks that are shared
		- by the entire market. Techincally termed 'systemic risk', this type of risk is also often called 'market risk' or 'un-diversifiable risk'.
	Risks that are exclusive
		- to an individual company or industry. Most often called 'specific risk', 'un-systemic risk' or sometimes 'diversifiable risk'.

Systemic Risk

All businesses operate in the same overall economic environment. They must all function according to similar accounting rules and tax schedules. They borrow money from the same sources and are subject to the same kinds of interest rate fluctuations. They share a common labor pool and have a somewhat equal regulatory burden. Their raw materials and their finished products are all bought and sold in the same inflationary or deflationary climate. All American businesses swim in the same economic ocean and are all subject, in varying degrees, to the same financial tides

Systemic risk is the risk that all businesses share. It does not necessarily influence all businesses equally, but its force is dominant enough to have an impact on every component of the business community. Systemic risk factors include: inflation, taxes, regulatory policy, litigation climate, interest rate levels, foreign trade policy, value of the dollar, consumer confidence, as well as other factors.

System risk is often called market risk, because it can move the entire market in one direct or another. It is also called ‘un-diversifiable’ risk, because diversification will not protect an investor from impacts to the overall market. Asset Allocation is a risk management tool for systemic risk. (See Asset Allocation & Modern Portfolio Theory - Risk Management Tools)

Specific Risk

In addition to being jostled by the ripples of the overall economy, an individual business faces a myriad of risks that are specific to itself and to its position in its industry. If a company does not perform as well as expected, its price will fall and the company may even collapse in financial failure. Perhaps a competitor develops better technology or launches a more effective advertising campaign. Perhaps the overall industry is going through a downturn or a transition. Maybe management fails to compensate for important consumer trends, or structures their corporate capital in a way that makes them too vulnerable to interest rate changes. They might be a major patent challenge or a better patent might be filed by a competitor. Business is a complex endeavor and there are thousands of reasons for one business to fail and another to succeed.

The most commonly prescribed financial medicine for specific risk is diversification. (see Diversifcation - A Risk Management Tool )

Note: The information provided herein is not complete. It is provided solely as a starting point. Volumes of information on the subject of market risk and investment risk have been written and are available online or through your local book seller. Individuals who are considering investing are specifically advised to aquaint themselves with the advantages and disadvantages of the various methods of limiting investment risk. Experts disagree as to the best methods of managing investment risk. None of the information presented here should be percieved, in anyway, as recommending of one method of risk management over another.

Diversification and asset allocation, within the framework of Modern Poftfolio Theory, are investment management tools that are commonly available to most investors. Other more effective risk management tools may or may not be appropriate to the reader.