Market risk, also known as systematic risk, refers to the potential for investors to experience losses due to factors that affect the overall performance of the financial markets. This type of risk is inherent to all investments and is not specific to a particular company or industry. It encompasses a wide range of economic, political, and social events that can cause fluctuations in market prices, including changes in interest rates, inflation rates, political instability, and global events. Market risk is unavoidable and can significantly impact an investment portfolio, regardless of the individual securities it contains.

One of the key components of market risk is interest rate risk, which relates to the possibility of losing money due to a change in interest rates. For instance, when interest rates rise, the prices of bonds typically decrease, affecting fixed-income investments. Equity risk is another aspect, involving the potential for stock prices to fluctuate due to market dynamics, affecting the value of stocks and equity investments. Commodity risk involves the risk of price changes in commodities such as oil, gold, and agricultural products, which can affect related stocks and the overall market. Currency risk, or exchange rate risk, affects investments in foreign markets, where changes in the value of the currency can impact the returns on those investments.

Diversification is a key strategy for managing market risk, as it involves spreading investments across various asset classes, industries, and geographical locations to reduce the impact of market fluctuations on the overall portfolio. While it is impossible to eliminate market risk entirely, understanding its components and how it affects investments can help investors make informed decisions and mitigate potential losses. Financial instruments such as options and futures can also be used to hedge against market risk, providing a form of insurance against adverse market movements.