The capital market risk usually defines the risk involved in the investments. The stark potential of experiencing losses following a fluctuation in security prices is the reason behind the capital market risk. The capital market risk cannot be diversified.
The capital market risk can also be referred to as the capital market systematic risk. While an individual is investing on a security, the risk and return cannot be separated. The risk is the integrated part of the investment. The higher the potential of return, the higher is the risk associated with it.
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The examination of the involved in the capital market investment is the one of the prime aspects of investing. It can be easily said that the risk distinguishes an investment from the savings. The systematic risk is also common to the entire class of liabilities or assets.
Depending on the economic changes the value of investments can fall enormously. There may be some other financial events also impacting the investment markets. In order to give a check to the capital market risk, the asset allocation can be fruitful in some cases.
Any investment in stocks or bonds comes with the following types of risks:
- Market Risk
- Industry Risk
- Regulatory Risk
- Business Risk
The market risk defines the overall risk involved in the capital market investments. The stock market rises and falls depending on a number of issues. The collective view of the investors to invest in a particular stock or bond plays a significant role in the stock market rise and fall. Even if the company is going through a bad phase, the stock price may go up due to a rising stock market. While conversely, the stock price may fall because the market is not steady even if the investor’s company is doing well. Hence, these are the market risks that the stocks investors generally face.
The industry risk affects all the companies of a certain industry. Hence the stocks within an industry fall under the industry risk. The regulatory risk may affect the investors if the investor’s company comes under the obligation of government implemented new regulations and laws. The business risk may affect the investors if the company goes through some convulsion depending on management, strategies, market share and labor force.
Last Updated on : 22 July 2016