Start with understanding
Investing Basics
Understand a little. Practice once. Write your own plan. Each lesson explains an idea with an example, then asks you to answer a question and write a short reason before reading the explanation. Gather your thoughts as you learn, then follow the prompts to write your own learning or investment plan.
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Sign in to save progressRead an explanation and example, then expand to see where it helps and what is easily misunderstood. Example figures are hypothetical.
Stock
Stock
- Plain meaning
- A stock represents part ownership in a company. Buying shares makes you a shareholder. You may benefit from a rising share price or dividends, but you can also lose money when the price falls; the company does not promise a fixed return.
- See it in an example
- Imagine a company with 10,000 shares, of which you own 100: that is 1% ownership. If the market price falls from 10 to 9 per share, your shares’ value falls from 1,000 to 900, before fees or dividends.
Explore uses and common misunderstandings
- When would I use this?
- When researching a company, separate liking its products from understanding the investment. Start with how it earns revenue, whether it makes a profit, and what could disrupt its business.
- Common misconception
- A familiar brand can still be a losing investment. Even a functioning business can see its share price fall when market expectations change.
ETF
ETF
- Plain meaning
- A fund pools investors’ money and invests toward a stated objective. An ETF is a fund whose shares trade on an exchange. One ETF share gives you a small interest in the fund, which may hold stocks, bonds, or other assets described in its disclosures.
- See it in an example
- Imagine two ETFs with different names that invest heavily in the same technology companies. Both could fall when those companies struggle. Their actual holdings tell you more than their names.
Explore uses and common misunderstandings
- When would I use this?
- In a fund’s disclosures, locate its objective, main holdings (the assets it owns), their weights, and its fees. Add anything unclear to your learning questions.
- Common misconception
- Owning an ETF does not automatically provide broad diversification. A fund focused on one sector can still be concentrated, and returns are not guaranteed.
Index
Index
- Plain meaning
- An index combines the performance of a group of assets into one number under defined rules. Its constituents are the included assets; their weights determine how much each influences the index.
- See it in an example
- In a simplified index, company A has an 80% weight and B has 20%. If A rises 5% and B falls 5%, the weighted index rises 3%. A rising index can contain falling stocks.
Explore uses and common misunderstandings
- When would I use this?
- When you read that the market rose, check which index is being cited and which companies it covers. For an index-tracking fund, also examine the index rules.
- Common misconception
- An index is a measure, not something you buy directly. Products such as funds may track it, with their own costs and risks.
Market capitalization
Market capitalization
- Plain meaning
- Market capitalization is the market value of all a company’s outstanding shares: share price multiplied by shares outstanding. It is the market’s price for the equity, not cash in the company’s bank account.
- See it in an example
- Company A has 100 million shares priced at 10, giving a market cap of 1 billion. B has 1 million shares priced at 100, giving 100 million. A’s lower share price still produces the larger market cap.
Explore uses and common misunderstandings
- When would I use this?
- Market cap helps compare company size. Read it alongside revenue, profit, and debt; deciding whether a price is reasonable requires more information.
- Common misconception
- A low share price does not by itself mean a cheap company. Companies have different share counts, so one share’s price is not enough for comparison.
Percentage change
Percentage change
- Plain meaning
- Percentage change tells you how much a price rose or fell relative to a baseline. Quote pages often use the previous trading day’s close, but always check the stated baseline and quote time.
- See it in an example
- If the previous close was 100 and the current quote is 102, the change is (102 − 100) ÷ 100 = 2%. If you bought at 110, today’s 2% rise does not mean your holding is profitable.
Explore uses and common misunderstandings
- When would I use this?
- For a quote, check baseline, currency, and time. For your own return, also examine purchase cost, fees, and dividends.
- Common misconception
- A percentage change describes the size of a move. It does not by itself explain the cause or measure your account return.
Trading volume
Trading volume
- Plain meaning
- Trading volume is the quantity of securities traded during a period, commonly measured in shares or market-specific lots. It describes trading activity, not the money value of those trades.
- See it in an example
- If 1,000 shares trade in the morning and 2,000 in the afternoon, daily volume is 3,000 shares. Each trade has a buyer and a seller; it is not counted twice just because both participated.
Explore uses and common misunderstandings
- When would I use this?
- Before comparing days, check matching units and sessions. Half a day’s trading cannot be directly compared with a full day without accounting for the difference.
- Common misconception
- Higher volume does not guarantee a rising price. Heavy trading can accompany a decline too.
Volatility
Volatility
- Plain meaning
- Volatility describes how much prices or returns fluctuate over a period. Larger fluctuations generally mean higher volatility. The time window and calculation method matter when reading a quoted value.
- See it in an example
- Two assets both start at 100 and finish at 105. One changes a little each day; the other falls to 80, rises to 120, then retreats. Their final gain is the same, but the second path fluctuates much more.
Explore uses and common misunderstandings
- When would I use this?
- When studying a product, examine the path as well as the final return, then consider how those fluctuations could affect your plans.
- Common misconception
- Low past volatility does not rule out a future sharp fall. Volatility also does not cover every risk, such as difficulty selling a product.
Drawdown
Drawdown
- Plain meaning
- Drawdown measures a decline from an earlier peak. Maximum drawdown is the largest such peak-to-trough decline in the selected period. It differs from profit or loss measured from your purchase cost.
- See it in an example
- An investment rises from 100 to 120, then falls to 90. The drawdown from the peak is (120 − 90) ÷ 120 = 25%, while the loss from the initial 100 is 10%.
Explore uses and common misunderstandings
- When would I use this?
- When reading past performance, check the period, data frequency, and treatment of dividends or deposits and withdrawals before comparing figures.
- Common misconception
- Historical maximum drawdown is a past observation, not a promise about the most you could lose in the future.
Position weight
Position weight
- Plain meaning
- Position weight is an asset’s share of a defined portfolio. First identify what is included, then divide the asset’s value by the portfolio’s total value.
- See it in an example
- In a portfolio worth 10,000, a stock worth 2,000 has a 20% weight. If another 5,000 in cash is included, the weight becomes about 13.3%.
Explore uses and common misunderstandings
- When would I use this?
- In your plan, define the funds included and the calculation basis. If borrowing is involved, distinguish gross assets from equity after liabilities.
- Common misconception
- The same 20% can mean different things with different denominators. The number alone does not establish suitability for a person.
Concentration
Concentration
- Plain meaning
- Concentration describes dependence on a few assets or related risk sources. It includes a single position’s weight and shared exposure to sectors, regions, or business models.
- See it in an example
- Suppose you hold five stocks whose businesses all depend on the same raw material. A sharp rise in its price could increase costs across all five companies.
Explore uses and common misunderstandings
- When would I use this?
- List factors your researched investments share. Different names can conceal dependence on the same risks.
- Common misconception
- A large number of securities does not necessarily mean a wide range of risks. Look for what the holdings have in common.
Diversification
Diversification
- Plain meaning
- Diversification spreads investments across assets and risk sources to reduce dependence on one holding. It can soften some individual setbacks, but cannot eliminate the risk of a broad market decline.
- See it in an example
- Suppose you own three funds and discover that their largest holdings are the same companies. Owning more funds may still leave substantial dependence on those companies.
Explore uses and common misunderstandings
- When would I use this?
- Compare funds’ main holdings, sectors, regions, and overlap. Understand their risk sources before assessing diversification.
- Common misconception
- Diversification does not guarantee against losses or require endlessly adding products. A very similar new product may barely change existing exposure.
Rebalancing
Rebalancing
- Plain meaning
- Rebalancing means checking whether asset weights have drifted from a previously chosen plan and considering adjustments under that plan. Price changes alone can alter weights even without trading.
- See it in an example
- A hypothetical portfolio starts with 5,000 in stocks and 5,000 in cash. If the stocks rise to 6,000, their weight becomes about 54.5%. Rebalancing asks whether that fits the original plan, rather than what is popular today.
Explore uses and common misunderstandings
- When would I use this?
- A plan can state when to check weights and what changes call for reassessment, alongside the potential costs and tax effects of adjustments.
- Common misconception
- The example’s weights illustrate arithmetic, not a recommended allocation. Rebalancing does not require trading after every price move.
Market order
Market order
- Plain meaning
- A market order seeks to buy or sell at currently available prices. It generally prioritizes prompt execution without a price ceiling or floor; a changing market can change the price you receive.
- See it in an example
- The last displayed trade is 100, but available sellers are at 101 when your order arrives. A market buy may fill at 101, or in several pieces at different prices.
Explore uses and common misunderstandings
- When would I use this?
- When learning about orders, separate execution timing from price limits. Check the rules of the relevant market and broker too.
- Common misconception
- The last displayed price records a past trade. It does not guarantee the price of your next order.
Limit order
Limit order
- Plain meaning
- A limit order sets a price boundary. A buy limit is the most you will pay; a sell limit is the least you will accept. A fill may be more favorable, but there may be no fill at all.
- See it in an example
- A hypothetical buy limit is 100 while available sellers ask 102. The order will not buy at 102. Even a quote at 100 may not produce a fill because of limited quantity or queue position.
Explore uses and common misunderstandings
- When would I use this?
- Distinguish submitted, partially filled, fully filled, and canceled order states. Successful submission does not mean a completed trade.
- Common misconception
- A limit constrains an acceptable fill price. It guarantees neither execution nor protection against losses after a purchase.
Bid–ask spread
Bid–ask spread
- Plain meaning
- The best bid is the highest available buying price; the best ask is the lowest available selling price. Their difference is the bid–ask spread, one part of understanding trading costs.
- See it in an example
- With a bid of 99 and ask of 100, the spread is 1. In a simplified unchanged market, buying at the ask and immediately selling at the bid leaves a difference of 1 per share before other fees.
Explore uses and common misunderstandings
- When would I use this?
- Read bid and ask prices alongside the quantities available. Session and order size can also affect actual costs.
- Common misconception
- Zero commission removes one category of charge, not costs such as the spread.
Liquidity
Liquidity
- Plain meaning
- Liquidity describes how easily an asset can be traded promptly near current market prices. Available quantity, the bid–ask spread, and order size all affect the experience.
- See it in an example
- Suppose you want to sell 100 shares but only 10 shares are wanted at the best bid. The rest may need to wait for buyers or trade at lower prices; one quote does not cover every quantity.
Explore uses and common misunderstandings
- When would I use this?
- Study trading conditions during normal and unusual sessions, and how a larger order might behave.
- Common misconception
- Active trading yesterday does not guarantee easy selling today. Liquidity can change with market conditions.
Revenue
Revenue
- Plain meaning
- Revenue is sales of goods or services recognized under accounting rules during a reporting period. It helps describe business scale, before subtracting the costs of running that business.
- See it in an example
- A shop recognizes 100,000 of monthly sales but also pays for inventory, wages, and rent. The sales figure describes business activity; it does not mean the owner earned 100,000 in profit.
Explore uses and common misunderstandings
- When would I use this?
- For revenue growth, check reporting periods, currencies, and business changes. Comparing the same quarter across years can be more interpretable than arbitrarily comparing two quarters.
- Common misconception
- Revenue recognition and cash collection can happen at different times. Read revenue, profit, and cash flow separately.
Net income
Net income
- Plain meaning
- Net income is the accounting result after revenue, costs, expenses, taxes, and other relevant items. A positive number generally means profit and a negative number loss, but it is not the change in bank cash.
- See it in an example
- In a simplified example, revenue is 1 million and costs, expenses, and taxes total 900,000, with no other gains or losses. Net income is 100,000. Any one-time gain from selling an asset would also need separate attention.
Explore uses and common misunderstandings
- When would I use this?
- Compare revenue and profit changes in a financial report, then examine the reasons and any one-time items.
- Common misconception
- One profitable quarter does not prove future profitability. Profit growth can reflect a one-time gain rather than improved core operations.
P/E ratio
P/E ratio
- Plain meaning
- The price-to-earnings ratio compares share price with earnings per share, the profit attributed to each share. Dividing price by earnings per share gives P/E. Past earnings and forecast earnings produce different measures.
- See it in an example
- If a share costs 20 and the annual earnings per share used are 2, P/E is 10. With the same price but earnings per share of 1, P/E becomes 20.
Explore uses and common misunderstandings
- When would I use this?
- Before comparing P/E, check the earnings basis, industry, and earnings stability. Record those differences rather than comparing one number alone.
- Common misconception
- A low P/E is not automatically a bargain; it may reflect concerns about falling earnings. P/E is often unsuitable for direct comparison when earnings are negative.
Dividend
Dividend
- Plain meaning
- A dividend is a distribution by a company to shareholders, often in cash but sometimes in other forms. Its amount and timing depend on company decisions and announcements; it is not fixed interest.
- See it in an example
- A declared cash dividend of 0.50 per share gives 50 for 100 eligible shares before taxes or fees. Share price changes still matter; that payment alone is not the investment’s net return.
Explore uses and common misunderstandings
- When would I use this?
- Read the eligibility, dates, and amount in the announcement. For longer-term performance, consider dividends together with price changes.
- Common misconception
- A history of dividends does not guarantee future payments. A company may reduce or stop them, and its share price can fall.
Learning and research support; no personal trade instructions or guaranteed returns. · Version 2026-09-13.1