The risk of market prices or values moving in an unfavorable direction.
Example:
Investing in a particular stock.
Downside Scenario:
The firm in question fails to exhibit the expected growth, and its stock value declines steadily. Eventually, the firm is forced to file for bankruptcy, rendering its stock worthless.
Upside Scenario:
The firm becomes the darling of the stock market, and five years later you walk away with a huge profit.
Related terms:
Interest Rate Risk
The risk that the value of an interest-bearing asset may move in an unfavorable direction due to interest rate movements.
Currency Risk or Foreign Exchange (FX) Risk
The risk that the rate of exchange between two currencies will move.
Reinvestment Risk
The risk that invested funds will have to be reinvested at lower rates.
Liquidity Risk
The risk that financial positions cannot be changed due to a scarcity of willing counterparties (buyers or sellers). Alternatively, the risk that positions cannot be changed without significant changes in prices. Liquidity risk has historically been a catch-all phrase for risk types that cannot be labeled more specifically.
Settlement Risk
The risk that a security or cash owed will not be provided by a counterparty, despite the counterparty’s contractual obligation to do so.
Systematic Risk or Undiversifiable Risk (also known as Market Risk, but different from definition above)
The risk inherent to a particular market, and which can’t be diversified away. This contrasts with:
Non-Systematic Risk or Diversifiable Risk or Residual Risk or Idiosyncratic Risk
The risk that is specific to a particular company or investment, and which may be diversified under proper conditions.