We continue our series on investment risk today by looking at market risk.
Market risk is the risk that an investment will decline in value due to negative economic developments or other outside events, such as political turmoil, that affect the entire market. This can be sub-divided into equity risk, interest rate risk currency risk and commodity risk.
Equity risk applies to investments in shares. This is the risk of loss due to the drop in a market price of shares you have purchased.
Interest rate risk applies to debt instruments such as bonds. This is the risk of losing money due to a change in interest rates. For example, if the interest rate goes up, the market value of a bond could decline.
Currency risk applies to changes in foreign exchange rates. It is the risk of losing money due to the change in value of one currency in relation to another currency. For example, if you own stocks valued in U.S dollars and the U.S. dollar declines in value versus the Canadian dollar, your U.S. stocks will be worth less in Canadian dollars.
Commodity risk applies to the changes in prices of commodities such as oil or gold. This is the risk of losing money if you own a commodity in which the prices decline. For example, if you own gold coins and prices decline, your gold coins are less valuable.