What is considered market risk?

Market risk refers to the potential for an investor to experience losses due to factors that affect the overall performance of the financial markets. This type of risk is also known as systematic risk, which is the risk inherent to the entire market or market segment.

Systematic risk cannot be eliminated through diversification, as it is tied to broader economic factors such as changes in interest rates, inflation, political instability, and economic recessions that impact all securities in the market. Therefore, it reflects the inherent uncertainties that come with investing in the market itself.

In contrast, liquidity risk pertains to the inability to buy or sell an asset without causing a significant change in its price, credit risk relates to the possibility that a borrower will default on a loan, and operational risk involves failures due to processes, systems, or human errors within an organization. These types of risks may affect specific assets or firms but do not encompass the overall risk associated with the economic environment that influences all market participants, which is the essence of systematic risk.