What is 'market risk'?

Market risk refers to the possibility that an investment's value will decline due to changes in market conditions. This can include fluctuations in stock prices, interest rates, currency exchange rates, and overall economic factors that affect the performance of investments. Investors face market risk because financial markets are inherently volatile and affected by a variety of unpredictable events, such as changes in consumer behavior, economic indicators, political events, and natural disasters.

Understanding market risk is crucial for investors as it helps them to assess potential losses and make informed decisions about their investment strategies. By recognizing that market fluctuations can lead to a decrease in the value of their investments, individuals can take steps to mitigate this risk, such as diversifying their portfolios or investing in more stable assets.