Financial Markets & Investing

A derivative is a financial contract whose value is based on the price of an underlying asset like a stock, commodity, or currency.

A futures contract is an agreement to buy or sell an asset at a set price on a specific future date.

An options contract gives the holder the right, but not the obligation, to buy or sell an asset at a set price before a deadline.

An ETF is a basket of securities that trades on a stock exchange like a single stock, often tracking an index.

An index fund is a fund that passively tracks a market index, such as the S&P 500, rather than picking stocks actively.

A mutual fund pools money from many investors to buy a professionally managed portfolio of stocks, bonds, or other assets.

An IPO is the first sale of a private company's stock to the public, turning it into a publicly traded company.

Market capitalization is the total value of a company's shares, found by multiplying the share price by the number of shares outstanding.

A dividend is a portion of a company's profits paid out to shareholders, usually in cash and on a regular schedule.

A capital gain is the profit from selling an asset for more than you paid for it.

The P/E ratio is a stock's price divided by its earnings per share, showing how much investors pay per dollar of earnings.

A bear market is a prolonged period of falling asset prices, typically a decline of 20% or more from recent highs.

Leverage is using borrowed money to increase the potential return of an investment.

Short selling is borrowing an asset to sell it now, hoping to buy it back later at a lower price and pocket the difference.

Yield to maturity (YTM) is the total annual return an investor earns if a bond is bought at its current price and held until it matures.

The primary market is where new securities are sold for the first time by the issuer, so the money raised goes directly to the company or government.

The secondary market is where investors trade securities that already exist, so the payment goes to the selling investor rather than to the original issuer.

Systematic risk is market-wide risk that moves nearly all assets at once, such as recessions or interest rate shifts, and diversification cannot remove it.

The efficient market hypothesis says asset prices already reflect all available information, so no one can reliably beat the market by using it.

Arbitrage is buying an asset in one market while selling the same asset at a higher price in another, locking in a profit with no exposure to price moves.

An asset bubble is a sustained rise in an asset's price far above what its earnings or use value justify, driven by expectations of reselling it higher.

A credit rating is a rating agency's graded opinion of how likely a borrower is to repay its debt in full and on time.

Venture capital is money that specialized funds invest in young, high-growth companies in exchange for an ownership stake rather than repayment.

Private equity is investment in companies whose shares are not publicly traded, usually by funds that buy control of a business and sell it years later.

A hedge fund is a private investment fund, open only to institutions and wealthy investors, that can borrow, sell short and trade derivatives freely.

A credit default swap is a contract in which the buyer pays a periodic fee and the seller pays out if a named borrower defaults or hits a defined credit event.

Securitization is the practice of pooling illiquid loans into a trust and selling investors tradable securities whose payments come from the pooled loans.

A random walk is a price series whose next change cannot be predicted from its past, so today's price is the best forecast of tomorrow's price.