Market risk
Market risk is a collective term for the factors which might make asset prices move – either up or down. It is the most visible risk while trading, you’ll see its impact flashing away whenever you open up a trading platform:
Typically market risk is the risk traders want exposure to as it is from this they seek to make a profit.
Systematic risk
Systematic risks affect the whole system and moves prices across the market, these include:
When a trader speculates on the price of markets like indices, currencies, commodities or government bonds they are typically speculating on systematic risk.
Unsystematic risk
Unsystematic risks only impact individual securities, not prices generally across the wider market. Examples of unsystematic risk in a company’s share price include:
There are many more. When a trader speculates on the price of individual shares they are typically exposing themselves to and speculating on both systematic risk and unsystematic risk. For instance, the price of a share can be impacted by say a tax policy change (along with lots of other shares in the market) and also if the company announces a product recall.
It is not for this course, but investors try to reduce unsystematic risks by buying a portfolio of shares.
Volatility
Market risk isn’t just about prices moving, it is also about how quickly they move. This is called volatility. If a market has high volatility then, generally, it is perceived by traders as being riskier.
- Market risk is a collective term for the factors which might make asset prices move – either way.
- Traders want exposure to market risk, otherwise, they wouldn’t be able to profit from price movements.
- Systematic risks affect the whole system and move prices across the market.
- Unsystematic risks don’t affect the whole market, just individual securities.
- Generally, with more volatility comes higher market risk.
