Financial risk is the chance that an investment or financial decision will result in a loss. Every financial activity carries some risk — the key is understanding, measuring, and managing it. Risk and return are inseparable: higher potential returns always come with higher risk.
Main types: market risk (prices move against you); credit risk (borrower defaults); liquidity risk (can't sell quickly); operational risk (system failures, fraud); and interest rate risk (rate changes hurt your position). Banks use VaR (Value at Risk) to estimate the maximum potential loss over a given period.
The 2008 financial crisis showed what happens when risk is underestimated and poorly managed. AIG needed a $182 billion bailout because it sold credit default swaps without understanding the risk. Post-crisis, Basel III regulations require banks to hold more capital reserves and conduct regular stress tests to prepare for worst-case scenarios.