Welcome to Financial Markets 101
Your interactive guide to understanding the fundamentals of financial markets and the statistical models that drive them.
Fundamental Concepts
What is a Stock?
A stock (also known as equity) represents a share in the ownership of a company and constitutes a claim on part of the company's assets and earnings. When you buy a company's stock, you're owning a piece of that company.
Supply and Demand
In financial markets, the price of a stock is determined by the law of supply and demand. If more people want to buy a stock (demand) than sell it (supply), the price goes up. If more people want to sell a stock than buy it, the price goes down.
Market Indexes
A market index is a hypothetical portfolio of investment holdings which represents a segment of the financial market. Indexes like the S&P 500 or the Dow Jones Industrial Average are used as benchmarks to gauge the overall performance of the market.
Bonds vs. Stocks
Stocks offer an ownership stake in a company, while bonds are a form of loan made to a company or government. Bonds are generally considered lower risk than stocks but typically offer lower potential returns.
Diversification
Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. The rationale is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any single holding.
Bulls vs. Bears
A "bull market" is a period of generally rising prices, where investors are optimistic. A "bear market" is a period of falling prices, characterized by investor pessimism and negative sentiment. These terms describe the overall market trend.
Order Types
A Market Order buys or sells a stock at the best available current price. A Limit Order buys or sells a stock only at a specific price or better. Limit orders give you more control over the price but may not be executed.
Advanced Concepts
Options Trading
Options are contracts that give the owner the right, but not the obligation, to buy (a "call" option) or sell (a "put" option) an underlying asset at a set price on or before a certain date. They are used for hedging and speculation.
Futures Contracts
A futures contract is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future. They are often used for commodities and financial instruments.
Algorithmic Trading
Also known as "algo-trading," this involves using computer programs to follow a defined set of instructions for placing a trade in order to generate profits at a speed and frequency that is impossible for a human trader.
Short Selling
Short selling is a trading strategy where an investor speculates on the decline in a stock's price. An investor borrows shares and sells them, hoping to buy them back later at a lower price and return the borrowed shares.
Statistical Models
Moving Averages
A moving average is a calculation to analyze data points by creating a series of averages of different subsets of the full data set. It is used to smooth out price data and identify trends.
Linear Regression
Linear regression is a statistical method used to model the relationship between a dependent variable and one or more independent variables. In finance, it can be used to predict stock prices based on factors like market performance.
Monte Carlo Simulation
A Monte Carlo simulation is a model used to predict the probability of different outcomes when the intervention of random variables is present. It can be used to understand the impact of risk and uncertainty in forecasting models.