What is market risk?

Market risk refers specifically to the possibility of experiencing losses in investments due to fluctuations in market prices. This encompasses various scenarios, such as changes in stock prices, interest rates, commodity prices, and overall changes in market conditions that can affect the value of securities. The essence of market risk lies in the inherent volatility of financial markets, which can lead to changes in the value of investments, regardless of the company's performance or economic conditions.

In contrast, while economic downturns can contribute to market risk, they are not the sole factor, as market price changes can occur independently of broader economic conditions. The risk associated with fraud specifically targets issues of security and trust rather than market dynamics. Lastly, risks associated with foreign currency fluctuations pertain to currency risk, which is a subset of market risk but not a comprehensive description of it. Thus, the defining characteristic of market risk is the potential for principal losses due to market price changes.