‘No risk no return’ is a phrase that truly explains the stock markets. Be it equity or derivative instruments, various types of risks can be associated with them. The motive of investors is to minimize the risk and maximize the returns.
Economy related risk
Stock market is highly influenced by economic changes or macro factors. For instance, factors such as economic performance of a particular country, interest rate movements, and international developments play a great role in deciding the movements in securities market. Any unforeseen changes in these factors can influence the securities market positively as well as negatively. Your investment is derivatives and equities will also be influenced by these macro changes.
Risks at industry or company level
Risks related to the condition of various industries or industry cycles also affect your return on investment in equity, future, options, and other securities.
For instance, if the industry you have invested in faces a setback due to any reason; you have the risk of loosing upon all or a part of your investment. Any changes in government regulations related to any particular industry affects the companies under that industry. This in turn will have an affect on your investment in these companies. if the company you invested in faces a downfall, your investment is at a risk of being wasted.
The risk related to any derivative you have invested in is related to the base securities that underline your investment. If your base securities are exposed to high risks, your investment will be categorized as a high risk investment. Change in value of derivatives, risk of failure to perform on the part of counterparty, and if any of the parties become insolvent explain market risks, credit risks, and legal risks associated with derivative instruments. Operational risk is also one of the major risks that can be associated with market of derivative instruments.