There are several risks associated with stocks. Market risk, business risk, and financial risk are all part of owning stocks. Although you assume risk in owning stock, the potential returns are higher than other investments.
Stock is generally owned for its growth potential. This potential growth is obtained through changes in the price of a share of stock. If the stock increases in value, the investor makes money when the stock is sold and has a capital gain. However, stock prices can go down in value and the investor can lose money if the stock is sold at that time. This change in market price of stock is considered market risk.
Beta is a measurement of market risk. The greater the beta over 1, the greater the risk of price changes. For betas under 1, there may be less swings in share price.
Other types of risk associated with stock are business risk and financial risk. These risks have to do with the type of company and its ability to manage the balance sheet and to make money. These types of risk can be managed by diversification (owning several different types of companies in different sectors). Different sectors of businesses perform differently in good and poor economic times. During periods of economic contractions, large cost items (housing, large machinery) do not perform as well as during times of economic expansion.
Financial risk is associated with companies managing their income and expenses. Owning stock in a variety of different companies allows an investor to spread out the risk of a company they own going bankrupt. Thus, diversification helps to spread out business and financial risks. Listed below are the list of sectors from the most stable but with little return to the riskiest with high rate of return.
Utilities—telephones, electric utilities, gas utilities
Energy—oil, natural gas
Financials—banks, brokers, thrifts, insurance, real estate
Industrial Cyclicals—aerospace, construction, machinery, machine tools, chemicals, metals, papers, building materials
Consumer Durable—autos, housewares, recreation/luxury, multi-industry
Consumer Staples—food, beverages, tobacco, household goods
Services—media, entertainment, personal and business services, waste management, transportation
Retail—all retail (except drug wholesalers)
Health—pharmaceuticals, health-care services, medical devices, drug wholesalers
Technology—computer hardware, software, electronics, electrical equipment, wireless communications