Full Answer Section

• Company-Specific Risk (Unsystematic Risk): This risk is unique to a particular company or industry. It includes factors such as poor management decisions, declining product demand, intense competition, labor strikes, regulatory changes affecting a specific sector, or even a public relations crisis. For example, a pharmaceutical company’s stock might drop sharply if its experimental drug fails clinical trials, irrespective of the broader market’s performance. This risk can be mitigated through diversification across various companies and industries.
• Liquidity Risk: While generally lower for large, publicly traded stocks, liquidity risk refers to the difficulty of selling an investment quickly without significantly impacting its price. Less frequently traded stocks might be harder to sell at a desired price, especially in times of market stress.
• Inflation Risk: This is the risk that the returns from an investment will not keep pace with inflation, eroding the purchasing power of the investment over time. While stocks are often considered a hedge against inflation in the long run, short-term inflationary spikes can negatively impact corporate earnings and stock valuations.
• Interest Rate Risk: Changes in interest rates can affect stock prices. When interest rates rise, fixed-income investments like bonds become more attractive, potentially drawing money away from stocks. Higher interest rates also increase borrowing costs for companies, which can reduce their profitability and, consequently, their stock valuations.