Understanding Company Specific Risk
By Julia O’Neal; MA, CPA
There are several kinds of investing risk, for example:
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Credit or company specific risk refers to the firm’s business and financial risks.
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Business risk is the risk inherent in the nature of the business.
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Financial risks are those in addition to business risk that arise from financial leverage [credit or debt].
Business Risk Example
An example of high business risk would be a computer component manufacturer whose product demand is highly sensitive to macroeconomic activity and who has small profit margins.
Assessment
A company’s unique business risk would be increased by adding debt to an already unpredictable business.
Conclusion
Can you appreciate that credit risk is associated with a firm’s ability to meet financial obligations on the securities [bonds, notes and obligations, etc.] it issues?
More importantly, do you invest with this risk in mind?
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Filed under: Risk Management | Tagged: Investing Basics |














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