What is Price Risk?
Price risk is simply the risk that the price of a security will fall.
How Does Price Risk Work?
Earnings volatility, unexpected financial performance, pricing changes, and bad management are common factors in price risk. For example, assume that Company XYZ is trading at $4 per share. The company is stable and doing well, but there is some uncertainty in the market about Company XYZ's new model of widget that it coming out next year, and the economy looks like it's headed for a recession. There is no certainty that the price of Company XYZ will stay at $4 per share or rise above $4, and thus investors in Company XYZ bear price risk when they hold the stock.
Why Does Price Risk Matter?
Managing price risk is one of the fundamental tasks of portfolio management. Estimating, predicting, and managing price risk are, in turn, primary objectives for nearly every investor. For example, knowing that price risk is real and that some investments will indeed lost value, investors hedge their portfolios via diversification, hedging, and/or trading strategically.
