Which type of institution is considered to have a higher market risk?

Investment firms are considered to have a higher market risk due to their nature of engaging primarily in the buying and selling of securities, which are subject to fluctuations in market prices. These firms manage portfolios that can be influenced by various factors, including economic conditions, interest rates, and investor sentiment, leading to potentially significant gains or losses within short periods. Unlike commercial banks, which focus on traditional lending and deposit-taking activities, investment firms deal directly with market volatility, making them more vulnerable to market risk.

Commercial banks primarily engage in safer, regulated activities, focusing on interest income from loans rather than capital gains from market activities. Their risks are more related to credit risk and liquidity rather than market risk. Insurance companies are also generally more insulated from direct market fluctuations because they manage risk through policies and often invest in bonds and stable assets. Real estate companies may experience fluctuations in the real estate market, but these fluctuations usually do not compare to the rapid and often unpredictable changes seen in the broader securities markets where investment firms operate.

Therefore, due to their direct exposure to securities and market dynamics, investment firms are recognized as having a higher market risk.