Risks Involved In Global Capital Markets

Any investment which is a long term financial instruments in the capital market exposes the investor to capital market risk. Experiencing losses because of a fluctuation in security prices is the main reason behind Capital Market risks. The risk is the incorporated part of the investment. The higher the potential of return, the higher is the risk involved with it.

As there are two types of capital markets- the stock market and the bond market, we will throw light upon the capital market risks involved in each case.

Capital Market Risk in the Stock Market

Unlike the bank deposits or government bonds, stock prices keep oscillating over a wide range. This has a considerable effect on not only the individual investors but the entire economy. Studies reveal that all price movements are random whereas there are plenty of evidence that there is a particular trend in the stock market prices over a period of time.

It’s for sure that certain psychological factors shape the stock market prices. Share prices can also fall without any perceptible reason. One can find the market responding illogically to any economic news. In response to press releases, rumors and mass panic, the stock market prices can get diverted in any direction. Due to the trend of the fast market changing events, the stock market prices may be very volatile in the short run.

Capital Market Risk in the Bond Market

Those market participants, who own the bond, do not face any capital market risk. They can collect the coupon and hold it till the expiry of the maturity date. However, the capital mar ket risk in the bond market can arise due to interest rate changes. An inverse relationship exists between the interest rate and the price of the bonds. A change in the monetary policy of the country can fluctuate the interest rate too. Hence, the monetary policy of the country as well as economic changes cause the bond prices to be susceptible./

The risks involved in Global Capital Markets do exist but with precise guidance and careful steps, one can easily handle these risks.