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Trading and Investment Terminology

Market Risk

Market risk refers to the risk that an investment may face due to fluctuations in the market.

 

In other words, it is the risk that the market overall will lose value, rather than that one or more stocks or sectors will go out of favor to be replaced by those upon whom investors are smiling.

 

Market risk contrast with specific risk, also known as business risk or unsystematic risk.

 

Market risk is defined as the risk to a financial portfolio from movements in market prices such as 

Equity prices

Foreign exchange rates

Interest rates, and 

Commodity prices.

Market risk is generally expressed in annualized terms, either as a fraction of the initial value (e.g. 6%) or an absolute number (e.g. $6).

Types of market risk

  1. Interest rate risk: The risk that interest rates will go up or down.
  2. Equity price risk: The risk that share prices will change.
  3. Exchange rate risk: The probability that foreign exchange rates will change
  4. Commodity price risk: The likelihood that a commodity price, such as that of a metal or grain, will change.
  5. Inflation RiskThe risk that overall rises in prices of goods and services will undermine the value of money, and probably adversely impact the value of investments.

 

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