Investment risk - Financial definition

Investment risk is an integral aspect of finance that reflects the uncertainty and potential financial loss associated with investing in different asset classes, such as stocks, bonds, real estate, or commodities. It arises from a variety of sources, including market volatility, economic changes, interest rate fluctuations, political instability, and company-specific factors.

For instance, market risk involves the broader movement of prices and interest rates, while credit risk pertains to the possibility that a bond issuer might default on payments. Additionally, liquidity risk highlights the challenge of quickly converting an investment into cash without significant loss of value. Understanding and managing investment risk is crucial for investors to make informed decisions, balance potential returns against possible losses, and develop diversified portfolios that align with their risk tolerance and financial goals. Practical examples include hedging strategies, such as using options or futures to mitigate potential losses, and employing asset allocation to spread risk across various investment types.