A type of risk that reflects the potential of losing part or all of an investment. It applies to the whole universe of assets that are not subject to a guarantee of full return of original capital. This risk arises from certain contributing factors including market volatility, economic/ market conditions, an entity’s performance (poor financial management), and interest rates. Investors should evaluate these factors before making investment decisions and diversify their portfolio to manage the risk. Capital risk refers to the potential loss incurred by investors (individuals or institutions) when investing in a company or business.

For example, if an individual has initially invested $5,000 in stocks. This initial investment is the capital invested or paid in. Therefore, the capital risk here is $5,000, irrespective of the current market value of these stocks at a certain point in time (that might be greater or smaller than the original capital invested.

In investing, capital risk involves taking position in assets with the expectation of earning a higher return compared to the original investment. Companies often raise capital by issuing stocks or bonds to investors, who take on the risks of investing in such instruments. However, in exchange for taking these risks, investors have the potential to earn profits through capital appreciation and/ or dividends.

Typically, investing in high-risk, high-reward venues such as startups or emerging markets is associated with a higher capital risk than investing in established venues. Stocks generally carry higher capital risk, compared to other instruments, as they represent shares in a company’s equity that are invested in for their potential appreciation in value and/ or their dividends.

Mitigation of capital risk depends on certain techniques, particularly diversification of investments, which spreads out investments across different sectors and consequently reduces overall exposure to any single venue. Investors should also restrict risk exposure to their affordability to lose, without venturing beyond their direct means. Furthermore, investment should be made while seeking professional advice from subject-matter experts. By taking all measure of caution and informed decision making, investors are more likely to produce  positive returns and avoid capital risk.

Other certain techniques can help reduce the likelihood and impact of capital risk while still allowing investors to gain positive returns from a variety of opportunities. This includes the use of stop-loss orders, lower risk investments, proper market analysis, and educated decision making process.

In another context, capital risk may also be generally defined as an entity’s inability to have access to monetary resources (and finance its capital requirements) at any time in time and balancing this with its efficient use.