Probability Definition

Probability is the chance that something will happen. Probability is used widely in financial markets to determine the risk associated with an investment. For example, depositing money in a savings account carries virtually no risk of loss and, therefore, has a low rate of return; on the other hand purchasing junk bonds carries a high risk of loss and, therefore, has a potentially high rate of return.

Numerous studies have shown that most Americans have a very poor grasp of probability, yet a good understanding of probability is vital to sound financial investing. Something that is not likely to happen is said to have a low probability of occurrence.