“Market risks” are risks specifically related to investments. These risks are defined by the behavior of the market overall, and can be caused by industries unrelated to your line of business. This means that any market fluctuations in any area can potentially affect your company’s investments.
Market risk also refers to risks that are inherent to investments, in the sense that some amount of uncertainty will always be at play. A high level of market risk can be dangerous, but that high risk also allows for a high rate of return from those same markets. While it is impossible to eliminate market risk entirely, you can manage your investments in such a way that loss is minimized, making it easier for your company to reach its financial goals.
Types of Market Risks
Interest Rate Risk
This risk is caused by changes in interest rates. Volatility in interest rates can cause the value of fixed-rate investments to decline, so maintaining awareness of interest trends is advisable for all investors.
Country risk is defined by the economy of wherever you are making investments, and the economic or political stability of that country. This stability can be affected by political unrest, natural disasters, international relations, disease outbreaks, and similar large-scale events.
Currency risk depends on foreign exchange rates. If the value of the currency used to make an investment goes down, the value of the investment will also fall. Or if you owe money in a foreign currency, the true cost of paying off the debt could rise or fall depending on how that currency moves in relation to other currencies.
Commodity risk is caused by staple products that are so key to the economy that any volatility in their cost can affect the entire market. This usually refers to products in industries like energy or agriculture.
Liquidity risk refers to how easy it is to turn an investment into cash flow. An investment with high liquidity risk will be difficult to sell off, whereas one with low liquidity risk will be relatively easy to sell for market rate.
What Are Some Methods for Managing Market Risk?
Determine Your Risk Tolerance
Before developing a market strategy, you should first decide how much risk you’re willing to shoulder. Investing can be complex, and beginners may not know how to navigate the market successfully. Some companies use Value at Risk Modeling (VaR) to measure how likely it is that an investment will result in a loss, but this will only help your investment decisions if you’ve decided in advance what risks you are comfortable making.
Diversify Your Assets
A simple strategy for managing your risk is to avoid making all of your investments in the same sector. Diversification of your asset classes can assure that a loss in one area will be offset by stability or gains in others. This isn’t a guaranteed defense against risk, as any market shifts can affect your investments; but strategically choosing your investments and derivatives can help protect you from truly devastating loss.
Hedge Your Investments
Hedging is an investment strategy that minimizes the potential loss you might incur should a stock value fall. This is done by purchasing an option, which gives you the right to sell your stock at an agreed-upon price should its value begin to dip. You may not see as high of a return on your investment as you would otherwise, but it’s an appealing method for those who do not wish to take on an extreme amount of risk.
Be aware of market changes and how fluctuations might affect your investments. You won’t be able to predict the future with perfect accuracy, but staying up to date on the stock market and its movements can help you know when to buy, sell, and hold.
Wait It Out
If the value of your stock dips, don’t panic. Minor changes in the market may have temporary effects that your accounts will be able to weather over time. Before selling, observe the trends the market is exhibiting overall and determine whether you can afford to hold on to a long-term investment.
ZenGRC Helps Businesses Minimize Risks
All businesses must accept some risk so they can grow. It is critical that your business prepare for potential risks, not only from the stock market but also from cyber threats, compliance issues, and any other factor that could halt operations and delay your company’s progress. With so much at stake, it can be difficult to know where to begin; how can you create a centralized database of all of your risk and risk prevention efforts?
ZenGRC has the answer. This integrated software gives you a complete view of your company’s entire risk and regulatory compliance landscape, with all the information you need right at your fingertips. By providing a single source of truth for your risk management, ZenGRC creates a centralized framework for your risk management strategy. Schedule a demo today and learn more about how ZenGRC can be a part of your company’s risk solution.