Understand investment products, market mechanics, indicators and research terminology. Each entry includes an explanation, example, cautions and related learning.
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Backtesting is the process of applying a fully specified trading or investment rule to historical data to see how it would have behaved, including its returns, losses and trading frequency. It is a research tool for studying a rule, not evidence that the rule will work in the future.
Backwardation describes a futures market in which contracts for later delivery are priced below nearer-dated contracts or the spot price. The futures curve then slopes downward as maturity lengthens.
A benchmark is a reference standard, usually an index or a blend of indexes, against which the performance and risk of a fund, portfolio or strategy is measured. It provides a yardstick for judging whether results came from skill, risk-taking or simply market movement.
The bid-ask spread is the difference between the highest price buyers are currently willing to pay (the bid) and the lowest price sellers are willing to accept (the ask). It is a cost of trading immediately and a common gauge of liquidity.
Bitcoin is a digital asset and payment network that runs on its own public blockchain without a central issuer. Software rules enforced by network participants cap its supply at 21 million coins.
A blockchain is a shared ledger that records transactions in linked blocks copied across many computers. Each block contains a cryptographic fingerprint of the one before it, so changing old records is detectable.
Bollinger Bands are a volatility envelope drawn around a moving average: a middle band, typically a 20-period simple moving average, with an upper and a lower band set a chosen number of standard deviations away, usually two. They were developed by John Bollinger.
A bond is a debt security in which an investor lends money to an issuer, such as a government or company, in return for scheduled interest payments and repayment of the principal at maturity.
A call option gives its buyer the right, but not the obligation, to buy a set quantity of the underlying asset at the strike price on or before expiration, in return for a premium.
A candlestick is a chart symbol that summarizes one period's opening, highest, lowest and closing prices. Its rectangular body spans the open to the close, and thin lines called wicks extend to the period's high and low.
A carry trade borrows or sells a low-interest-rate currency to hold a higher-interest-rate one, aiming to earn the interest-rate difference. It is exposed to exchange-rate moves that can erase or exceed that difference.
A commodity is a raw material or primary product, such as crude oil, copper, wheat or gold, that is largely interchangeable with other units of the same grade. Buyers care mainly about grade, quantity, location and delivery date rather than the producer.
Contango describes a futures market in which contracts for later delivery are priced above nearer-dated contracts and the spot price. The futures curve then slopes upward as maturity lengthens.
Correlation is a statistic between −1 and +1 that measures how closely two return series move together in a straight-line sense. A value of +1 means they move in perfect step, 0 means no linear relationship, and −1 means they move in exactly opposite directions.
A coupon is the periodic interest payment a bond issuer makes to bondholders, normally stated as an annual percentage of face value called the coupon rate.
A credit spread is the extra yield a bond pays over a comparable-maturity benchmark, such as a government bond, to compensate investors for credit, liquidity and other risks. It is usually quoted in basis points, where 100 basis points equal one percentage point.
Crypto custody is how the private keys that control crypto assets are stored and protected. Whoever controls the keys controls the assets, so custody is handled either by the owner (self-custody) or by a third party such as an exchange or specialist custodian.
A currency pair quotes the price of one currency, the base, in units of another, the quote currency. In EUR/USD the euro is the base and the US dollar is the quote, so a price of 1.2500 means 1 euro costs 1.2500 US dollars.
Delta is the option Greek that estimates how much an option's price changes for a one-unit move in the underlying price, holding other factors constant. Call deltas range from 0 to +1 and put deltas from −1 to 0.
Diversification is spreading capital across holdings whose returns do not move in perfect step, so that the combined portfolio is less volatile than the weighted average of its parts. It mainly reduces risks specific to one company, sector or asset.
A dividend is a distribution of part of a company's profits or reserves to its shareholders, most often paid in cash and declared per share. Dividends are decided by the board and are not guaranteed.
Dividend yield expresses a stock's annual dividend as a percentage of its current share price. It shows the cash income a share pays relative to its price, not the total return.
Drawdown is the percentage decline of an investment, account or strategy from its previous peak value to a later low. Maximum drawdown is the largest such peak-to-trough fall over a chosen period.
Duration measures how sensitive a bond's price is to changes in interest rates, expressed in years. Macaulay duration is the present-value-weighted average time to receive the bond's cash flows, and modified duration converts it into an approximate percentage price change for a one percentage point change in yield.