Risk grade is an investment rating used to determine relative volatility between forms of securities. An assessment helps investors measure the overall risk of owning a security, and the lower the risk grade, the less risk to an investor in owning the security over the long term. A stock backing a young Internet company will carry a higher risk grade than a stock for a utility company, which has a history from which historical financial data can be drawn.
A risk grade of zero denotes no risk. Cash is considered the only financial instrument without investment risk. A grade between 100 to 150 is considered is the baseline market risk. An average risk range for securities and other equities is a score of 150 to 650. Any security with a score of 650 or above is considered highly risky.
The market risk is the standard risk an investor should expect when investing in any form of security. The market risk takes into account currency spreads, interest risk fluctuations and rising commodity prices.
Currency spreads are used to determine a stock risk because different currencies are used to invest in stocks. If a German investor is buying American equities with euros, the investor has to take into account the fluctuating value of the dollar to the euro.
Interest Rate Risk
Interest rate risk is more a factor when comparing bond offerings, as opposed to investing in stocks. When interest rates rise, the prices of bonds rise.
Investment advisers use commodity prices as a factor in determining equities' risk grades because rising commodity prices affect a corporation's bottom line and can cause a stock to fall in value. An example would be a take-out pizza chain. When the price of wheat or cheese rises, the cost to the company rises and investors tend to sell the stock.