Markets 101.

Equities are just another word for stocks. When you buy a share, you own a small slice of a real company, which makes you a part owner of everything it has and everything it earns. Big companies are split into billions of these shares, so any single one is a tiny fraction, but it's still real ownership, and it sometimes comes with the right to vote on certain company decisions.

Companies become buyable in the first place through an IPO, short for initial public offering, when a private company sells shares to the public for the first time. After that, those shares trade back and forth between investors on an exchange, which is what's happening every day when you see a stock price move up and down.

There are two ways you make money from a stock. The first is price appreciation, where the share ends up worth more than you paid and you sell it for a gain. The second is dividends, which are payments some companies send to shareholders out of their profits, usually every few months. Younger, faster-growing companies often skip dividends and put the money back into growing, while older, steady companies tend to pay them.

What moves a stock's price over time is mostly the company's earnings and what people expect those earnings to do next. Rising profits push prices up, bad news pushes them down, and short-term mood can swing them around either way. Stocks have delivered the highest returns of any major asset class over the long run, but they also swing the most, which is the tradeoff for that growth.

Most people don't buy individual stocks one at a time. They buy an index fund, a single fund that holds a whole basket of companies at once, like every company in the S&P 500. It's cheap, spreads your risk automatically, and is the most common way ordinary people own equities. The same idea exists for other asset classes too, with bond index funds and commodity funds.

A close cousin is the ETF, short for exchange-traded fund. It's also a basket of holdings, but it trades on an exchange like a regular stock, so you can buy or sell it any time the market is open at whatever its current price is. A traditional index fund, by contrast, is priced just once a day after the market closes. Plenty of index funds are actually ETFs, so the two overlap a lot. For a beginner the takeaway is the same either way: one purchase gets you a diversified basket instead of a single bet.

Commodities are basic physical goods that come out of the ground or off a farm. They fall into a few groups: energy like oil and natural gas, metals like gold, copper, and silver, and agriculture like wheat, corn, and coffee. What makes them different from stocks is that one unit is the same as any other. A barrel of a given grade of oil is worth the same no matter who produced it, so commodities compete purely on price.

You usually don't buy the physical thing and store it in your garage. Most people get exposure through funds or ETFs that track a commodity's price, or through futures, which are contracts to buy or sell at a set price on a future date. Futures exist partly so real businesses, like an airline that needs fuel or a farmer selling a harvest, can lock in a price ahead of time. Gold is one exception people do sometimes hold directly.

Commodity prices come down to supply and demand. A drought can spike wheat, a conflict can spike oil, and a mining boom can sink copper. Because so much of it depends on weather, politics, and how fast the economy is growing, commodity prices can be some of the most volatile in any market, and they often move in long cycles that boom for years and then slump for years.

Unlike a company, a commodity has no earnings and pays you nothing to hold it, so its whole value is what the next buyer will pay. That makes them volatile, but some, like gold, are popular as a hedge, meaning something people buy to protect themselves when other investments or the dollar are struggling. Commodities are also closely tied to inflation, since when raw materials get more expensive, so does almost everything made from them.

A bond is a loan. When you buy one, you're lending money to a government or a company, and in return they promise to pay you interest along the way and give your original amount back on a set date called the maturity. That original amount is the face value, and the regular interest payment is called the coupon. Governments and companies issue bonds to raise money, the same way you might take out a loan, just on a much bigger scale.

There are a few main kinds. Government bonds, like US Treasuries, are backed by the government and treated as some of the safest investments there are. Corporate bonds come from companies and pay more because they carry more risk. Municipal bonds come from cities and states, often to fund things like schools and roads.

Bonds are generally safer than stocks, which is the whole point of them. In a portfolio they're the steady part that holds up when stocks fall, and retirees often lean on them for reliable income. The trade is that they usually earn less over the long run. You do take on some risk: if the borrower runs into trouble and can't pay, that's called credit risk. Ratings agencies grade bonds for exactly this reason, and a shakier borrower has to offer higher interest to get anyone to lend to it.

One thing that surprises people is that bond prices move opposite to interest rates. When new bonds start paying higher rates, older bonds paying less become worth less, and when rates fall the reverse happens. For now the main idea is simpler: bonds trade lower returns for more stability, which is exactly why a portfolio holds them next to stocks.

Currencies are money itself: dollars, euros, yen, pounds. The currency market, often called forex, is where one currency is traded for another, and it's the largest and most active market in the world, with trillions of dollars changing hands every day. Prices are quoted in pairs, like EUR/USD for euros per dollar, because a currency's value only means something relative to another one.

What moves exchange rates is mostly big-picture economics. Interest rates set by central banks like the US Federal Reserve, inflation, how strong a country's economy looks, and trade between countries all push a currency up or down. If one country raises interest rates, its currency often strengthens, because investors can earn more by holding it. In rough times money also tends to flow into currencies seen as safe, and the US dollar is the classic safe haven.

A currency getting stronger or weaker ripples out into real life. A strong dollar makes imported goods and overseas travel cheaper for Americans, but makes US products more expensive for foreign buyers, which can hurt companies that sell abroad. A weak dollar does the reverse. So even the price of things on your local store shelf is partly a currency story.

Most people never trade currencies directly, but you're still affected by them every day. Traders who do buy and sell currencies often use heavy borrowing to amplify small moves, since exchange rates usually only shift by tiny amounts. That leverage makes forex one of the riskier corners of the market and not a place beginners should start.

A derivative is a contract whose value comes from something else, called the underlying asset, like a stock, a commodity, or a currency. You're not buying the thing itself, you're buying an agreement based on where its price goes. Futures, which came up under commodities, are one kind, and they obligate both sides to go through with the trade. Options are the kind you'll hear about most, and they work a little differently.

An option gives you the right, but not the obligation, to buy or sell an asset at a set price before a certain date. A call is the right to buy, a put is the right to sell, the set price is called the strike, and the date it runs out is the expiration. You pay a fee up front for the option itself, called the premium, and that premium is the most you can lose if the bet doesn't work out.

People use options in two very different ways. Some use them to hedge, protecting something they already own, like insurance against a drop. Others use them to speculate, betting on a price move with a small amount of money up front. Say a stock is at $100 and you buy a call with a $110 strike. If the stock jumps to $130, your option is worth a lot. If it never gets above $110, the option expires worthless and you lose what you paid.

The reason options get so much attention is leverage. A small price move in the underlying asset can turn into a large percentage gain, or a total loss, on the option. That cuts both ways hard, and many options expire worthless. They're a real tool that professionals use carefully, but they're an advanced one, and an easy way for a beginner to lose money fast.