Investing is something that many people are interested in, but they’re afraid of one thing: losing money. After all, investments are subject to market risk, but what exactly does market risk mean?
Market risk refers to stock market conditions. There is no guarantee that your investment will grow. The market never stays the same, so your investments may not grow as quickly as expected. Their value could even decrease.
This is because many factors affect market risk. There is no way to predict what will happen in the future, and the market is no exception. While risks can be reduced, they cannot be eliminated. No investment is risk-free due to two main risks involved: market risk and specific risk.
Also known as systematic risk, market risk consists of many components. Investments are subject to market risk primarily based on these risk components:
- Interest rate
In short, market risk refers to the risk caused by changes in the markets, or volatility. This can be measured by beta, which determines a stock’s risk relative to the overall market.
Also known as unsystematic risk, specific risk does not affect the entire stock market. Instead, it is specific, only affecting a particular industry or company. For example, a lack of oil could affect the oil industry. A pharmaceutical company could have a drug recalled, causing its stock to drop. Even weather conditions can be a factor. A snowstorm could shut down many businesses, but companies that sell snow removal equipment or cold-weather clothing would fare much better.
Specific risks may be caused by these factors:
- Business risk. This refers to internal or external issues that the company may face, and could include an issue with a specific product or service.
- Financial risk. A poor quarter for earnings or a lack of cash flow are financial factors that can cause a company’s stock to drop.
What Investors Can Do
While stocks and mutual funds are subject to market risk, investors can reduce both market risk and specific risk by diversifying their portfolios. You can reduce stock and mutual funds risk by choosing a mix of companies and exchange-traded funds (ETFs) for a curated portfolio that meets your goals for risk and return. When you go this route, you’ll likely experience that some investments in the portfolio will fall but others may go up in value. Having a diverse portfolio will help minimize your losses.
Start Investing Today!
Don’t let the market scare you! Even though investments are subject to market risk, they are also subject to huge gains. When you invest in US stocks, you have the opportunity to make a lot of money. Vested offers more than 1,500 stocks, with no brokerage fees. Investing with us is easy. Sign up today to get started!