Risk and Uncertainty in Stock Market

One hears the words risk and uncertainty more often in the stock market, and whenever there is panic in the stock market these two words are used as if there is no other word in the dictionary. While both the risk and uncertainty are used interchangeably they both have different meaning. Let’s look at both of them one by one –

Risk refers to the possibility of an event happening which one does not want to happen. So for example if one is buying a stock of a company whose earnings are dependent on the price of crude than there is a risk that crude price may fall and therefore stock earnings will also fall leading to a loss to an investor. Risk can be avoided by certain steps like one can short sell crude and hedge against falling crude price, in the same way as one can take life insurance against the risk of death.

Uncertainty refers to lack of knowledge of the event happening, so for example nobody can say where will be the stock market after 2 years because stock market are affected by so many factors and therefore nobody can be certain about the movement in stock market and therefore one cannot insure against uncertainty unlike risk against which one can insure or hedge.

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