Financial Markets

The fundamental mechanism that determines asset prices in financial markets. When demand for a security exceeds supply, prices rise; when supply exceeds demand, prices fall. Market prices continuously adjust to reflect new information and changing participant sentiment.

The ease with which an asset can be bought or sold in a market without significantly affecting its price. Highly liquid markets have many active participants, tight bid-ask spreads, and high trading volumes, enabling rapid execution of trades.

The theory that asset prices fully reflect all available information at any given time, making it impossible to consistently achieve returns above the market average through stock selection or market timing. The hypothesis exists in three forms: weak, semi-strong, and strong.

The principle that potential investment returns rise with increasing risk. Low-risk investments tend to offer lower returns, while higher-risk investments must offer the possibility of higher returns to attract investors. This tradeoff is foundational to portfolio construction.

The strategy of spreading investments across various asset classes, sectors, geographies, and instruments to reduce overall portfolio risk. Diversification works because different assets often respond differently to the same economic event, so losses in one area may be offset by gains in another.

The inverse relationship between interest rates and bond prices. When interest rates rise, existing bonds with lower coupon rates become less attractive, causing their prices to fall. Conversely, when rates decline, existing bonds with higher coupons increase in value.

The total market value of a company's outstanding shares, calculated by multiplying the current share price by the total number of shares outstanding. Market cap is used to classify companies into large-cap, mid-cap, and small-cap categories and is a key measure of a company's size.

Financial instruments whose value is derived from an underlying asset, index, or rate. Common derivatives include options, futures, forwards, and swaps. They are used for hedging risk, speculation, and gaining leveraged exposure to assets.

A bull market is a sustained period of rising asset prices, typically defined as a 20% or greater increase from recent lows, driven by economic optimism and strong investor confidence. A bear market is a sustained decline of 20% or more from recent highs, often accompanied by pessimism and economic contraction.

Statistical measures that track the performance of a specific group of stocks or other financial assets, serving as benchmarks for market performance. Indices are constructed using different weighting methodologies, including price-weighted, market-cap-weighted, and equal-weighted approaches.