How to understand the evolution of individual risk into systemic risk? 5

First of all, we understand from the meaning of these two terms themselves, the so-called systemic risk is the risk that affects the overall situation;

And individual risks are those that affect the local, or individual.

Starting with specific examples, it is easy to determine which ones belong to the global and which ones belong to the local.

For example, the risk of Apple's stock price fluctuation can be broken down into two parts.

One part is Apple's own fluctuations, such as the death of Steve Jobs, the market reaction of the new iPhone model, and the iPhone was recalled urgently because of its defective products.

You see, these fluctuations have nothing to do with other companies in the market, whether it's Google or Starbucks.

In financial terms, these fluctuations, or risks, of Apple are independent of other companies, and are called individual risks.

From an individual investor's point of view, these risks are important because if you buy Apple's, your wealth will go up and down with these fluctuations.

However, from the perspective of the market as a whole, these risks are less important and do not cause overall market volatility.

Why? First, this fluctuation only affects Apple's sales, and has little to do with other companies and other industries, and its influence is limited.

Second, there are thousands of companies in the market, and when Apple's stock price is ** or **, there are some companies whose stock price is exactly at ** or **, which completely offsets Apple's fluctuations.

Therefore, when you look at the financial market from a holistic perspective, you will find that these individual risks or fluctuations are dispersed, so this individual risk is also called diversible risk.

And you think, we're also citing the example of Apple, which is the world's largest company by market capitalization, the giant leader of Internet companies.

If you want to move to a slightly smaller company, then the individual risks unique to these companies will not cause market turmoil.

If you still feel that the word "risk" is abstract at this point, let me give you another example.

You see, if a pebble, even if it is a huge one, if thrown into the sea, it will only cause a slight ripple on the surface of the water.

Only the tides cause the whole sea to surge, and the tides are the second part of the risk that I want to tell you about, which belongs to the volatility of the overall market.

For example, if the United States is going to change its term, the Federal Reserve's interest rate level is going to change, and the global smartphone industry is going to rise wildly, then Apple's stock price will definitely change with these events.

What's more, almost all financial assets fluctuate as a result of these factors.

So there's no way you can spread out these risks by holding enough assets.

In the terminology of finance, these risks are global systemic risks, also known as non-diversifiable risks.

Systemic risk, of course. The so-called systemic risk refers to the possible changes in investment returns caused by common factors of the overall situation, which have an impact on all ** returns in the same way. Systemic risk is market risk, which refers to the impact of environmental factors such as overall politics, economy, and society.

Systemic risks include policy risk, economic cyclical fluctuation risk, interest rate risk, purchasing power risk, exchange rate risk, etc. This risk cannot be eliminated through diversification, hence the term non-diversifiable risk.