Market risk is the uncertainty in the returns that an investor has in the market due to macro-economic factors that cut across all the assets in the market. Market risk can also be defined as the likely-hood of an investor to incur losses in the portfolio he holds in the market that is caused by the factors that affect the financial markets performance. Market risks have an effect on the stock prices of shares and investments. Their occurrence cannot be ignored as it has far reaching effects on the investments of the people.
An example of a market risk is political turmoil. Political turmoil is a situation characterized by political unrest and instability in the country. This risk has an effect on the stock prices and investments in the financial markets as investors will refrain from investing in the affected country. The currency of the affected nation will decline and make it less competitive in the market. Such a market risk cannot be ignored, and any investor should analyze the political situation of any nation before investing in the country. Financial crisis is another market risk that affects the stocks in the financial market. Financial crisis occurs when the home currency depreciates with regards to other trading foreign currencies. This may arise due to high rates of inflation or devaluation. Financial crisis makes the stock prices fall making investors lose much money in investments.
Change in interest rates is another market risk that is considered when analyzing the level of market risk. An increase in interest rates scares investors away as they fear that their investments may not yield the expected returns. On stocks, the high interest rates may translate to low prices of shares leading to immense losses.
References
Finra. (2014, June 6). Market Risk: What You Dont Know Can Hurt You . Retrieved June 6, 2014, from Finra-Investors: http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/p018891
Investing Answers. (2014, June 6). Market Risk. Retrieved June 6, 2014, from Investing Answers- financial dictionary: http://www.investinganswers.com/financial-dictionary/investing/market-risk-2360
