What type of risks are associated with common stock investments?

Investing in common stocks involves multiple types of risks, primarily market risk and specific risk.

Market risk, also known as systematic risk, relates to the overall fluctuations in the stock market. It affects a broad range of securities and is influenced by factors such as economic changes, political events, and natural disasters. This type of risk cannot be diversified away and affects all stocks regardless of the company’s performance.

Specific risk, or unsystematic risk, pertains to risks that are unique to a particular company or industry. This could include issues like management changes, product failures, or competitive pressures that might impact a specific stock's value. Unlike market risk, specific risk can be mitigated through diversification. By holding a variety of investments, an investor can reduce the potential impact of adverse events that affect any single security.

Having both market and specific risks in the context of common stock investments provides a comprehensive understanding of the potential exposure investors face. By recognizing that both categories of risks exist, investors can develop strategies to manage and mitigate their investment risks more effectively.