What does 'market risk' refer to in investing?

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 encompasses a broad range of influences, such as economic downturns, political instability, changes in interest rates, and shifts in investor sentiment. Essentially, market risk captures the idea that the value of investments can fluctuate based on wider market forces rather than factors specific to a particular company or investment.

In this context, understanding market risk is crucial because it emphasizes the volatility and uncertainty inherent in investing. It highlights that even well-researched investments can lose value simply due to external market changes. Other aspects such as company-specific risk, borrowing on margin, and currency exchange fluctuations represent different forms of risks that do not fully encapsulate the broader risks associated with market-wide movements. Thus, the definition of market risk accurately reflects its role in investment decision-making, helping investors to strategize their portfolios accordingly to mitigate potential losses from these systemic changes.