Glossary

Capital Preservation

Capital preservation is a conservative investment strategy that prioritises protecting the principal amount of investment, even at the cost of lower returns. Capital preservation is more suitable for risk-averse investors.

Credit Default Swap (CDS)

A Credit Default Swap (CDS) is a financial derivative where one party transfers the risk of a borrower defaulting to another party in exchange for periodic payments, providing protection against credit losses on bonds or loans.

Haircut in the Stock Market

Haircut in the stock market means the amount reduced from an asset’s market value when using it as collateral for a loan. Haircut acts as a safety buffer for lenders, mitigating potential losses if the collateral's value decreases.

Hedge

A hedge is a way to protect your investment from losses by using tools like options, futures, or swaps. It helps reduce risks if the market goes against you.

Hedging with Futures

Hedging with futures involves taking an offsetting position in a futures contract to protect against potential losses in an existing investment.

Maximum Drawdown (MDD)

Maximum drawdown (MDD) is the largest drop in the value of an investment or portfolio from its highest point to its lowest point during a specific period. It represents the worst-case loss an investor could face during adverse market conditions.

Position Sizing

Position sizing in trading refers to the process of deciding how much of a total capital to allocate to a single trade based on factors like risk tolerance, account size, and market conditions.

Risk-Reward Ratio

The risk-reward ratio is a metric in trading that helps traders gauge how much risk they should undertake to capture those returns.

Stop Loss Order

A stop loss order is an instruction to a broker to buy or sell a security when it reaches a specified price, known as the stop price. This mechanism is designed to limit an investor's potential loss on a position.

Value at Risk (VaR)

Value at risk is the minimum loss that would be expected a certain percentage of the time over a certain period of time, given the assumed market conditions. It can be expressed in either currency units or as a percentage of portfolio value.

Volatility

Volatility is a statistical measure of the magnitude and speed of price movements in a financial asset over time. It reflects the degree of uncertainty or risk associated with an asset’s returns, with higher volatility indicating larger and more frequent price swings.