What are the three main types of financial risks?

The three main types of financial risks are market risk, credit risk, and operational risk.

Market risk arises from fluctuations in the value of investments due to changes in market conditions. This encompasses various factors such as price volatility in stock markets, interest rates, and foreign exchange rates that can affect the overall market environment.

Credit risk involves the potential for loss due to a borrower's failure to repay a loan or meet contractual obligations. This is particularly important for financial institutions and investors, as it directly impacts their profitability and stability.

Operational risk is related to failures in internal processes, people, and systems, or from external events. This can include anything from technical failures to fraud, and it highlights the risk that arises from day-to-day operations.

Together, these risks represent significant concerns for financial institutions and firms, requiring comprehensive risk management strategies to mitigate their impact. Understanding these categories allows practitioners to better assess and manage the various challenges that financial entities may face.