what is market risk 
market risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the financial markets that is to say it is risk of market price and interest rate movements investopedia yurle villegasunderstanding market riskmarket risk and specific risk unsystematic make up the two major categories of investment risk market risk also called systematic risk cannot be eliminated through diversification though it can be hedged in other ways sources of market risk include recessions political turmoil changes in interest rates natural disasters and terrorist attacks systematic risk or market risk tends to influence the entire market at the same time this can be contrasted with unsystematic risk which is unique to a specific company or industry also known as nonsystematic risk specific risk diversifiable risk or residual risk in the context of an investment portfolio unsystematic risk can be reduced through diversification market risk exists because of price changes the standard deviation of changes in the prices of stocks currencies or commodities is referred to as price volatility volatility is often presented in annualized terms and may be expressed as an absolute number such as 10 or a percentage of the initial value such as 10 publicly traded companies in the united states are required by the securities and exchange commission sec to disclose how their productivity and results may be linked to the performance of the financial markets this requirement is meant to detail a company s exposure to financial risk 1 for example a company providing derivative investments or foreign exchange futures may be more exposed to financial risk than companies that do not provide these types of investments this information helps investors and traders make decisions based on their own risk management rules other types of riskin contrast to the market s overall risk specific risk or unsystematic risk is tied directly to the performance of a particular security and can be protected against through investment diversification one example of unsystematic risk is a company declaring bankruptcy thereby making its stock worthless to investors the most common types of market risks include interest rate risk equity risk currency risk and commodity risk managing market riskif you are investing there is no single way to completely avoid market risk but you can use hedging strategies to protect against volatility and minimize the impact that market risk will have on your investments and overall financial health for example you can buy put options to protect against a downside move when targeting specific securities or if you want to hedge a large portfolio of stocks you can utilize index options use a variety of these strategies to manage market risk and protect your portfolio dollar cost averaging won t protect you against market risk but investing the same amount of money on a regular schedule can help you ride out ups and downs in the market taking advantage of periods of both low costs and high returns if you are investing in foreign markets pay attention to the currency profiles of the companies in which you invest industries that import more for example will be impacted by changes to the local currency industries that export more will be affected by changes to the value of the euro or dollar allocate your assets across a variety of industries to mitigate risk and invest in markets and companies backed by strong currencies to manage interest rate risk pay attention to monetary policy and be prepared to shift your investments to account for interest rate changes for example if you are heavily invested in bonds and interest rates are rising you may want to tweak your investments to focus on shorter term bonds 