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CHAPTER 29 Risk Management > Unsystematic Risk

Unsystematic Risk

This is company-specific or industry-specific risk. You can avoid unsystematic risk by diversifying your portfolio. There is no way you can reduce systematic risk because it is related to outside events. However, you can minimize common investor mistakes and thereby minimize your portfolio risk. The following tips can minimize portfolio risks and increase investment return:

1. Don’t use margin accounts.

2. Maintain sufficient diversification.

3. Stay away from the herd mentality.

4. Avoid day trading.

5. Use a research-based investment approach.

No Margin

Margin means borrowing money from a broker to buy shares. For example, if you have $100,000 in your account, you can borrow up to another $100,000 from a broker and then buy shares worth up to $200,000. Different stocks have different margin requirements and vary with each brokerage house. Normally you can borrow up to the amount of cash available in your account. Brokers charge you interest for the money you use on margin.


  

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