Stock Market Glossary
Counterparty risk
Risk that the other party to a contract does not fulfil its obligation.
In brief: Risk that the other party to a contract does not fulfil its obligation.
Meaning in practice
Counterparty risk matters for OTC derivatives, securities lending, repos and certain structured products. Collateral, clearing and daily valuation can reduce but not fully remove it. Investors should understand who their contractual partner is and whether a product is segregated fund property or a claim on an issuer.
Context for investors and traders
For traders, this term is most useful when preparing and executing an order. Its meaning depends on the venue, liquidity, time frame and order type. A single reading is not a reliable buy or sell decision.
How to use this in practice
Use the term first to describe the situation and add verifiable data: time frame, benchmark, costs and liquidity. Only then does it become an assessment that can be connected to an investment objective and risk budget.
What to keep in mind
Avoid false precision. Many market terms describe probabilities or historical patterns; they neither guarantee a return nor replace the review of a specific security.
