Understanding Market Risk

The possibility of an individual or other entity experiencing losses due to factors that affect the overall performance of investments in the financial markets is termed market risk.

Diversification doesn’t have an impact on the market risk, though it can be influenced by recessions, political turmoil, changes in interest rates, natural disasters, and terrorist attacks. Market risks, also known as systematic risks, tend to influence the entire market at the same time.

Non-systematic risk, on the other hand, is a unique approach in regard to an investment portfolio, unsystematic risk can be reduced through diversification.

Market risks are influenced by price changes. A deviation of prices of stocks, currencies, or commodities is referred to as price volatility.

Other Types of Risk:

The specific risk or unsystematic risk is linked directly to the performance of a particular security and can be protected against through investment diversification, in comparison to the market’s overall risk.

The most common types of market risks include interest rate risk, equity risk, currency risk, and commodity risk.

In contrast to the market’s overall risk, specific risk or “unsystematic risk” is tied directly to the performance of a particular security and can be protected against through investment diversification. One example of unsystematic risk is a company declaring bankruptcy, thereby making its stock worthless to investors.

The most common types of market risks include interest rate risk, equity risk, currency risk, and commodity risk.

• Interest risk rate covers the uncertainty that may accompany interest rate fluctuations due to fundamental factors. This risk is relevant to investments in fixed-income securities, such as bonds.
• Equity risks are the risk involved in the changing prices of stock investments.
• Commodity risk covers the changing prices of commodities such as crude oil and corn.
• Currency risk, or exchange-rate risk, arises from the change in the price of one currency in relation to another.