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Financial Markets Vocabulary

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Bull Market

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A financial market of a group of securities in which prices are rising or are expected to rise.

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Bear Market

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A financial market in which prices are falling, especially over a long period.

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Liquidity

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The measure of how quickly and easily an asset can be converted to cash without significant loss in value.

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Asset Allocation

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An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon.

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Diversification

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The practice of spreading your investments around so that your exposure to any one type of asset is limited.

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Stock

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A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.

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Bond

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A fixed income instrument that represents a loan made by an investor to a borrower, typically corporate or governmental.

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Mutual Fund

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An investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, and other assets.

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Exchange-Traded Fund (ETF)

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A type of security that tracks an index, commodity, bonds, or a basket of assets like an index fund but trades like a stock on an exchange.

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Volatility

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Refers to the frequency and severity with which the market price of an investment fluctuates.

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Derivative

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A financial security with a value that is reliant upon or derived from an underlying asset or group of assets.

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Hedge Fund

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An alternative investment using pooled funds that employ different strategies to earn active return, or alpha, for their investors.

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Market Capitalization

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The total market value of a company's outstanding shares of stock.

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Yield

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The income return on an investment, such as the interest or dividends received from holding a particular security.

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Initial Public Offering (IPO)

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The process of offering shares of a private corporation to the public in a new stock issuance.

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Dividend

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A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.

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Price-to-Earnings Ratio (P/E Ratio)

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A valuation ratio of a company's current share price compared to its per-share earnings.

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Return on Investment (ROI)

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A performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments.

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Credit Rating

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An evaluation of the credit risk of a prospective debtor, predicting their ability to pay back the debt and an implicit forecast of the likelihood of the debtor defaulting.

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Fiscal Policy

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The use of government spending and taxation to influence the economy.

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Monetary Policy

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The process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

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Commodity

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A basic good used in commerce that is interchangeable with other goods of the same type.

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Options Contract

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A financial derivative that represents a contract sold by one party (option writer) to another party (option holder).

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Index Fund

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A type of mutual fund with a portfolio constructed to match or track the components of a financial market index, such as the S&P 500.

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Leverage

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The use of borrowed money (debt) to amplify the potential return of an investment.

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Insider Trading

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The trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company.

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Capital Gain

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An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price.

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Interest Rate

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The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.

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Mortgage

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A loan taken out to buy property or land, which comes with a 'lien' on the property that the lender can possess if repayments are not made.

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Arbitrage

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The simultaneous purchase and sale of the same asset in different markets to profit from tiny differences in the asset's listed price.

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Treasury Bond

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A fixed interest government debt security with a maturity of more than 10 years.

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Credit Default Swap (CDS)

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A financial derivative that allows an investor to 'swap' their credit risk with that of another investor.

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Price Discovery

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The process of determining the price of an asset in the marketplace through the interactions of buyers and sellers.

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Quantitative Easing

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A monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to inject liquidity directly into the economy.

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Inflation

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The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

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Gross Domestic Product (GDP)

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The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.

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Financial Leverage Ratio

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A measure of the degree to which a company utilizes borrowed money to finance its operations.

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Deflation

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The reduction of the general level of prices in an economy.

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Portfolio

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A collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange traded funds (ETFs).

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Risk Tolerance

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An individual investor's ability to accept loss of some or all of the money they have invested, based on a number of factors including age, financial situation, and long-term goals.

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Capital Market

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A financial market in which long-term debt (over a year) or equity-backed securities are bought and sold.

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Junk Bond

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A high-yielding bond with a lower credit rating than investment-grade corporate bonds, Treasury bonds, and municipal bonds.

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Capital Expenditure (CapEx)

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Funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment.

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