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In general, finance means 'having to do with money'. However, most of the things which are considered finance have to do with generalizations of lending and borrowing money or with generalizations of insurance. I recommend trying to think of most financial services as elaborate forms of the activities of lending and insuring.
For now, pretend that the value of cash is constant.
When you lend someone money, you give them some money for awhile and then they have to pay it back. The money you lend is called "the principal". There's a chance that they may go broke and be unable to pay you back (not paying back a loan is called "default"). This risk to the lender of not being paid back is called "credit risk". If you are lending money to lots of people, then some of them will go broke and others won't. To break even, you'd have to purchase some insurance against a borrower not paying you back. But then you have to pay the insurance premium, so you are still losing money. So you have to charge the borrowers a fee to cover your insurance premium. The insurance premium will be larger the more money you lend. Therefore, so must the fee you charge the borrowers. This is why people must be charged interest on loans.
Since the rate of default cannot be known in advance (e.g. if there is some disaster, then a lot of people will go broke all at once and the rate of default will spike), the break-even interest rate can be estimated but not known for certain. The lender will not lend money if there is a chance they will lose money and no chance they will make money, therefore the market interest rate will be greater than the break-even rate (the word "market" is here to distinguish from the "break-even" interest rate; "market" means "the rate that will happen if there are a bunch of transactions by a bunch of people on each side of the transaction who can each voluntarily decide if they want to do the transaction or not"). That is to say, generally the interest charged to the borrower is greater than the amount that would be necessary to cover the estimated chance of default. This means that rates are such so that the lender is estimated to profit in proportion to the amount of money lent.
Therefore, a loan is a form of investment. "Investment" means a way of spending or temporarily spending money such that you hope you will get more money back than you spent. Investments always have a risk of not going the way you planned, however, in which case you may get back less money than you put in ("lose money"). If you get back more than you put in, that's a "profit", if you get back less, that's a "loss". If you get back $10 more than you put in, we sometimes use the phrasing "you're up $10" (and if you get back $20 less than you put in, "you're down $20"). The "risk" of of making money is called "upside" and the risk of losing money is called "downside". The "return" of an investment, often called "return on investment", is the amount of money you get back, minus the amount you put in, divided by the amount you put in. The return is also called a "profit rate".
Another reason that the lender might want to be paid more than the estimated chance of default is that it's a bother to spend their time negotiating with the borrower, reminding them to pay up, going to the ATM to get the money, etc. These are called "transaction costs" or "friction".
Another form of transaction cost is social. If the borrower is in a tough spot, there are times when you'll want your money back anyway (perhaps you think that their situation isn't as bad as they think; or you think it's their own fault; or you think you're just as badly off so why should they get to keep the money instead of you, especially since it was yours before you lent it to them). Then the borrower and their friends will think you're a mean person.
If you want to lend money to people but you don't want to bother with it, you can deposit the money in a bank. The bank will lend out the money and will collect interest. It will use some of that interest to cover for defaults. It will use some of it to cover transaction costs. It will take some of it as profit (if you don't like this bit, you can put your money in a credit union instead of a bank; a credit union is a form of co-op, which means that the customers are also the owners). And it will give the rest to the depositors.
Note that part of what we pay the bank for is the social transaction costs. When the bank goes to ask for your money back from the borrower, it's the bank that makes the call, not you.
If you lend money to $100 to someone (at 0% interest, to make it simple), you could in theory tell the borrower not to pay you back, but instead to pay the money back to a friend ("Bob"). In this scenario, you lose $100 and Bob gains $100. So Bob should pay you $100 for the privilege. This is called "selling a loan". The legal/financial system provides a way to "package" loans to make them easy to sell; so you can sell the loan to Bob, and Bob can sell it to someone else, relatively easily (emphasis on the "relatively" here). This "packaging" is called "securitization".
Most people won't get hit by a car and have to go to the hospital. But some will. Which means that, without further intervention, a few people will, through no fault of their own, lose all their money in hospital bills. To ameliorate this, a lot of people can make a pact, saying, "if any of us get hit by a car and go to the hospital, all of us will split the hospital bills". In this case, most people (the ones not fated to be involved in auto accidents) steadily pay a little bit more than they would have, but no one (no one in the pact, that is) loses all their money. So, everyone in the pact is volunteering to take a small but almost-certain loss in exchange for eliminating the chance of a large but very unlikely loss. This is insurance. Like banks, insurance comes in a for-profit form (where a third party intermediary arranges everything and takes a profit) and a co-op form.
If you lend $10000 to one person with break-even interest, then either they'll pay you back or they won't. So, you have a large chance of a small gain and a small chance of a large loss. Most people would rather trade this for a large chance of a slightly smaller gain and almost no chance of loss. That's what happens if you lend $10 to 1000 people, in which case almost certainly a small percentage of people will default and the rest won't (this toy example assumes every person's credit risk is exactly the same, and doesn't depend on how much money they are borrowing, neither of which are remotely true). But people want $10000 loans, not $10 loans, and you only have $10000. So, you pool your money with a bunch of other lenders. This is what a bank does. A bank pools credit risk the same way that an insurance pact pools the risk of hospital bills.
This is a special case of "diversification". Diversification is when there is an asset with an unreliable return (whether the asset is "future hospital bill liability", which has a negative return, or "return on lending", which has an estimated positive return), but there are a bunch of assets in the same asset class which don't all behave the same, and so if you buy a bunch of them you can "smooth out" (average out) the return.
When you diversify you remove risk by spreading it out. You say, "I don't know what's going to happen in any particular case, but whatever happens, I don't want it to affect me much". You are claiming ignorance, and you don't want your ignorance to hurt you. The opposite of diversification is "speculation". When you speculate, you say, "I am making a prediction on what will happen. If I am right, I want to make a lot more money than I otherwise would." You are claiming that you are not ignorant, and you want to be be rewarded for taking a stand. Usually you cannot make money without risking the loss of money. So, usually when you speculate, you risk losing money if you are wrong. Whereas diversification is "spreading out risk" (over many people -- alternately, each person spreads out their returns over many possible worlds to "smooth out" the landscape across potential realities), speculation is "concentrating risk" (so that, if your prediction is right, you make a lot of money, not a little -- but if it's wrong, you lose a lot -- if you plot the amount of money you have across potential realities, with right/wrong being on the horizontal axis, a speculator wants a steep slope).
One way to speculate is securitization. Let's say Bob can see the future and Bob knows that no one in the world will go to the hospital ever. Now, Bob could offer to insure his friends, and then they'll pay him a small premium, but he won't make much money because that's not many people. What Bob would like is to insure EVERYONE IN THE WORLD tomorrow, or at least as many people as he can. With securitization, he can buy the insurance policies from all the insurance pools (this is called "reinsurance", btw). This makes things safer for th insurance pools, because they don't have to worry about those policies anymore (except to the extent that Bob might default and not pay up). But it makes things riskier for Bob, because what if he's wrong? So the risk is merely shifted around.
In the real world, any security is traded on the market, which means that there are probably other people besides Bob who think they know better than other people what will happen. If there is reason to suspect tht no one in the world will go to the hospital much in the future, these people will bid down the premiums. So the amount of money Bob makes by speculating is not determined mostly by his knowledge edge over the rubes, but mostly by his knowledge edge over the other people who are somewhat in the know (including the other people who are just guessing, but who are irrationally sure of their guesses and happen to be guessing right). This makes speculation even more dangerous than you might think, because even if you are right, you will make less money than you might expect if you expected that you would be paid in proportion to your knowledge edge over the rubes.
A securitized loan is called a bond. When you buy a corporate bond, you are buying a promise from some corporation to pay you a certain amount over time. There's some chance that the corporation will go broke, but on the other hand they are paying the bondholders more than the amount of money they got when the bond was created.
Another form of securitized investment very similar to a loan is called "equity". Stock is a form of equity. When a company issues stock, the buyers pay them money, just like lenders. And over time the money pays the shareholders money back (called "dividends"), just as borrowers pay back lenders. The difference is that, with stock, the company often does not promise to pay ANY particular amount of money back. Instead, the company promises to share all of its profits with the shareholders. So, if the company makes a lot of money, you do too. But if it does not make money, you don't get anything, not even the principal. And even if the company makes money, you have no idea how long it will take before you get any of it (although equity also comes with voting rights, too, that let the shareholders collectively force the company to distribute money; in fact, collectively, the shareholders own the company).
So, with both loans (bonds) and stocks, what you are really doing is lending money to someone, hoping that they will pay you more back than you lent. The difference is only in what circumstances you get paid. With bonds, the borrowers promises to pay you a set amount -- your upside is limited, but the only way you lose money is if the borrower breaks their promise (defaults). With stocks, the borrower promises that if they make money, you will share in their success. The upside is unlimited, but you can lose money even if the borrower never breaks a promise -- because if they don't make money, neither do you. So, you can see that with stocks, you are taking on more risk.
In reality, the value of cash is not constant. Currencies inflate (lose value) and deflates (gain value). For example, if you lend someone $100 for one year at a 10% interest rate, but over that year the value of the dollar decreases by 15% (15% inflation), then even though you end the year with $110, this is only worth as much value as $93.50 was worth at the beginning of the year. So, overall, you've lost value.
This is a special case of a general concept called the "time value of money", which just means that the value of money varies over time. For example, if the value of the dollar is decreasing every year, then you'd rather have $1 last year than $1 this year.
It's not entirely clear how to measure inflation. The government publishes inflation numbers but some people disagree with the method used to calculate them. Besides technical issues, there are real philosophical issues here. One issue is that the "quality of life" may go in difficult-to-measure ways; for instance, maybe now you can buy a washing machine and an internet connection, whereas in 1800 you could not. Does this mean that, other things being equal, $1 in 1800 would be worth less, just because you couldn't have used it to buy internet? These are interesting philosophical questions for economists to ponder, but in the meantime, I recommend just using the government numbers.
In the example above, I said that if you get $110 at the end of next year but there is 15% inflation, then next year you'll really only have the same amount of value as $93.50 right now. $93.50 is called an "inflation-adjusted" number. Inflation-adjusted rates of return are called "real rates of return". You almost always want to think in terms of inflation-adjusted numbers and real rates. For example, if on average you can make 5% per year in investments and on average there is 2% inflation, then your real rate of return is 3%.
Many consider it "crazy" to invest more than about 80% in equity (rather than some in equity and the rest in something with lower risk, like bonds). A common rule of thumb is 60% equity, 40% bonds. The equity, being a high risk/high return asset class, goes up a lot in bull markets but then goes down a lot when the market crashes.
As far as anyone can tell, the fact that markets go up ("boom") and then crash ("bust") has always been happening (since there have been markets) and always will happen. It's not a sign that society has done anything wrong (or, if it is, then whatever we're doing wrong is something we've always been doing). It would be very incautious for an investor to assume that, just because no one seems to be doing anything wrong, that the market won't crash anymore. I'll say that again: do not assume that this time is different. Rather, you should assume that the market is SUPPOSED to go up, and it's SUPPOSED to crash (and the crash is supposed to come at an unexpected time and take most people by surprise). If you lose a lot of money in the crash, that's not someone else's fault for causing the crash, it's your fault for assuming (contrary to all historical evidence) that there wouldn't be a crash.
A lot of folks get LESS performance from each asset class that they invest in than the asset delivers on average. This is because people have a tendency to buy assets that have been doing well over the past few years/decade, and they also have a tendency to sell (and not buy) things that have crashed in the last few years/decade. That means that the human tendency is to buy something that's been rising (and hence is now relatively high) and sell something that's been falling (and hence is now relatively low). That's buying high and selling low, the opposite of what you should be doing.
