Investing is inherently risky. Market risk and business risk are two risks investors should understand.
What Is Market Risk?
Market risk is the daily possibility that an investor will lose money, due to fluctuations in securities prices during the trading day.
What does it mean for investors?
Not all stocks have the same market risk levels. A stock's beta gauges of how much market risk it faces. A stock with a beta of less than one will likely move less than the general market, while a beta higher than one indicates it will likely move more.
What is Business Risk?
Business risk is the risk that a company will not be able to pay for its operating expenses because its cash flow is insufficient.
What does it mean for investors?
A company faces risks from its structure and the external environment. Business risk is related to the former--does a company have enough money? It may not, if its assets are illiquid or it has too much debt.
However, even if a company is debt free with plenty of cash, its business may still suffer if the economy slows.
Similarities
Although market risk and business risk are two different things, they are both tools an investor should use when choosing stocks.
