What is the risk involved in securities trading?
Stock trading consists of risks that may affect the stock prices to decrease or to be highly volatile. We can classify those risks into three main categories as follows:
- The systematic risk or market riskis the uncertainty happening to the entire market which cannot be diversified away, such as economic risk, inflation risk, political risk, interest rate risk, etc.
- Unsystematic riskis the uncertainty happening to a specific company or industry, which can be reduced through diversification. Such risks can be company insolvency risk, internal accounting fraud, insider trading activity, etc.
- Liquidity riskrefers to the risk that the buyers and sellers cannot find one another on a timely basis to trade at a fair price due to lack of liquidity in its given market.