Whether you’re a seasoned veteran or a brand new investor, the financial world can be a daunting and confusing place. The learning curve is steep, and many institutions and individuals assume a broad baseline of knowledge, even if they don’t provide the tools to attain that knowledge. In this tutorial, we’ll explore some of the basic concepts and theories that investors have developed as a means of attempting to explain the behavior of markets. This will include concepts like dollar cost averaging and diversification, both of which are useful in particular for individual investors. We’ll also take a look at some of the more academic and theoretical concepts. Regardless of your experience and interests as an investor, these concepts help to provide the foundation of a good working knowledge of the ways that the market behaves.
First up, we’ll consider one of the most important underlying concepts of the financial world: the risk/return tradeoff.