Market risk is an umbrella category that captures the risk that your investment may decline in value as a result of unfavourable economic developments or events that affect the whole market.

While there are many components of market risk the main types of market risk you could face as an investor are equity risk, interest rate risk, and currency risk.

Equity risk is the risk that arises from holding an investment in shares. It is the risk of the loss in value of those shares because of a drop in the market price of shares.

Interest rate risk is the risk that arises from holding an investment in bonds. Following the same logic as equity risk, it is the risk of losing money because of a change in the overall interest rate. As a rule of finance, as interest rate increase the market value of a bond will fall.

Currency risk is a risk that arises from holding investments in a foreign (non-Trinidad and Tobago) currency. It is the risk of losing money because of an adverse movement in the exchange rate against the Trinidad and Tobago dollar. If you hold an investment denominated in Guyanese dollars and the Guyanese dollar loses value against the Trinidad and Tobago dollar, your Guyanese dollar denominated investment will lose value and so will any return paid to you from the investment in Guyanese dollars that you choose to repatriate to Trinidad and Tobago.

Usually, people hold investments to generate returns.

However, under some circumstances you may need to sell an investment – perhaps to fund an unforeseen emergency.

Liquidity risk arises if you are unable to sell the investment you hold quickly at the existing market price because of a lack of buyers in the market. The only way to sell the investment quickly may be to accept a value that is below the existing market price. This discount to market price represents the immediate liquidity risk.

Inflation risk is the risk that your investment loses value because it does not grow in value at the same rate as general prices increase.

In other words, your investment lose value because they lose purchasing power. If you hold your investments in the form of savings held in a deposit account, then in times of rapid inflation – as we are experiencing throughout the world now – those savings lose value because over time the purchasing value of your savings falls.

When you make an investment, you do so for a defined period or term. For example, if you make an investment for one year at today’s date at 5% and when you come to reinvest in one year’s time interest rates have fallen to 4% that fall in the interest rate represents your reinvestment risk.

It is the risk of loss arising from reinvesting your money at a lower rate of interest.

Foreign investment risk is the risk of losses that may arise from holding an investment in a foreign country.

Investments in Emerging Markets tend to pay a higher rate of return because part of the risk of investing in an Emerging Market is the risk that the investment will be lost because of events that occur in that country.

Horizon risk is the risk that your investment timeline may be changed (usually shortened) by some event that was not foreseen when you made the original investment.

Imagine making an investment with an intended duration of three years and then finding after the first year that you must liquidate the investment because of personal reasons such as a medical emergency.