What is non-systematic risk?

Non-systematic risk refers to the type of risk that is specific to a particular company or industry, rather than the overall market. It encompasses factors such as management decisions, operational performance, or competitive pressures that affect only that specific entity. For example, if a company faces a lawsuit or a data breach, this risk only impacts that company and not the broader market.

Investors can mitigate non-systematic risk through diversification, which involves spreading investments across various industries or companies so that the negative performance of one does not significantly impact the overall portfolio. This contrasts with systematic risk, which influences the entire market, such as economic recessions or interest rate changes, and cannot be easily mitigated through diversification. Understanding the nature of non-systematic risk is crucial for effective risk management within investment strategies.