5 types of Financial Risks you should know

Financial risk means the probability to lose money or fail to meet certain financial expectations. 

Losing money can affect the business operations and financial stability of an organisation. 

Financial risks can as well be beneficial; it can lead to growth. A company with good financial risk management will be able to identify potential risks, navigate such risks and control them using various methods.

Below are the types of financial risks you should know:

Liquidity risk 

Liquidity risk is when a financial institution, business or even you as an individual cannot meet particular financial obligations when due.

This is usually the case when there is insufficient cash or rather, assets cannot be easily converted to cash. 

You could end up in this type of financial risk because of sudden drop in market value or credit unavailability. 

Liquidity risk can make you end up in financial hardship, borrow and reputational damage.

Operational risk

Operational risk could happen to an organisation when their internal systems are not efficient enough or may be human factors. It also entails misconduct, fraud, errors and disruptions which all can negatively affect the reputation of a company.

Market risk

This is a financial risk caused by changes in market conditions which include exchange rates, commodity prices, interest rates and stock market prices. Market risk can affect currencies, bonds and stocks negatively. You can do a thorough research on market movements to minimize such risk.

Systemic risk 

Systemic risk is the instability in the financial system that can completely disrupt the economy. This is because financial institutions or other financial systems are interconnected. 

In other words, when there is a breakdown in one system, it can escalate to other areas and cause a financial crisis. Examples include, market crash or economic downturn. 

Credit risk

This is a financial risk that refers to someone not able to repay a loan or debt which can later result in financial losses for the investor or lender. 

Your creditworthiness is one of the major things that would be assessed to know if you are  worth the credit risk.