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Investing in stock, equity, shares, bond or any other form is combined with a lot of risks associated with each of these. We need to first understand what this kind of risk is and how it may affect our money and find out the ways to combat such risk and reduce its effect on our investments.
This is the type of risk that is associated with the stock market investments and their proceedings. This is one of the huge reasons for the losses experienced by investors because of the overall performance of the financial markets. This is also referred to as systematic risk, which cannot be eliminated but is hedged.
Some of the causes of market risk are
- Political instability
- Change in interest rates
- Recession in the market conditions
- Terrorist issues
- Natural disasters
These situations need to be kept in mind, prior to their occurrence and remedial measures need to be kept ready for such times. One common and most recommended method to reduce the effect of such risks is diversification of your investments. This means you keep your money in different baskets rather than all in one basket. This makes complete sense in making arrangement to save our hard-earned money.
Types of market risk
Therefore to take optimal decisions and keep aware of such risks we need to look into the types of such risks that might affect our investments. These are classified into 4 types. They are
- Interest rate risk: this is the risk which occurs due to central bank regulation changes that happen time to time. Also, changes in monetary policy will affect it. This risk is relevant to an investment in fixed-income securities and bonds.
- Commodity risk: this covers the risk associated with a change in the price of commodities such as crude oil and corn.
- Currency rate risk: this is also exchange rate risk which arises from a change in the price of one currency to other currency. Investors holding money in different countries are subject to these risks.
- Equity risk: when there is a change in stock price, the risk arising from these are called as equity risk.