Retirement accounts, investments, savings accounts, you name it – there are several different vehicles through which to save and build wealth, as well as more than a few obstacles in the way.
That’s why understanding the terms and definitions of the most common things you will come across on your financial journey is important to make the best decisions – for now and for the future.
35 Finance Terms Defined
We compiled this glossary defining some of the most common financial terms worth understanding. This list is organized by category to help you locate the most common terms related to your specific situation or interest.
Personal Finance Terms
Budget: A financial plan that outlines an individual’s or organization’s income and expenses over a specific period.
Bankruptcy: A legal status of an individual or entity that cannot repay their outstanding debts. The process involves a court-ordered resolution to relieve the debtor of some or all of their debts.
Net Worth: The difference between an individual’s or entity’s total assets and total liabilities. It is a measure of wealth and financial health, indicating the overall value of one’s possessions after debts are accounted for.
Liquidity: The ease with which an asset or investment can be quickly converted into cash without significant loss of value. High liquidity is associated with assets like cash and stocks, while real estate and certain investments may have lower liquidity.
Gross income:
The total earnings of an individual or business before deducting taxes and other expenses. It includes wages, salaries, bonuses, and any other sources of income.
Credit Score: A numerical representation of a person’s creditworthiness, based on their credit history and other financial behaviors. Lenders use credit scores to assess the risk of lending money to an individual.
Interest Rate: The percentage charged by a lender to a borrower for the use of borrowed money. It is a crucial factor in determining the cost of loans and can vary based on factors such as creditworthiness and prevailing market conditions.
Mortgage: A loan secured by real estate, typically used to finance the purchase of a home. The borrower agrees to repay the loan with interest over a specified period, and failure to do so may result in the lender taking ownership of the property through foreclosure.
401(k): A retirement savings plan sponsored by an employer, allowing employees to contribute a portion of their salary to a tax-advantaged investment account. Contributions are often matched by the employer, and the funds grow tax-deferred until withdrawal in retirement.
Individual Retirement Arrangement/Account (IRA): A personal retirement savings account that provides tax advantages for individuals. There are different types of IRAs, such as Traditional and Roth, each with its own rules regarding contributions, tax treatment, and withdrawals.
Investment Basics
Asset: Any resource with economic value that an individual, corporation, or country owns or controls, with the expectation that it will provide future benefit. Examples include cash, stocks, real estate, and intellectual property.
Portfolio:
A collection of financial assets such as stocks, bonds, and cash equivalents held by an individual or an institution. Portfolios are designed to achieve investment goals and manage risk through diversification.
Diversification: The strategy of spreading investments across different assets or asset classes to reduce risk. Diversification aims to maximize returns by investing in a variety of assets that may have different levels of correlation with each other.
Risk and Return: The fundamental relationship in finance that suggests a direct link between the level of risk and the potential for return on an investment. Generally, higher potential returns are associated with higher levels of risk.
Compound Interest: Interest calculated on the initial principal and also on the accumulated interest from previous periods. Compound interest leads to exponential growth in the value of an investment over time.
Capital Gain: The profit realized from the sale of a capital asset, such as stocks or real estate. It is the difference between the sale price and the original purchase price.
Depreciation: A decrease in the value of an asset over time, often due to wear and tear or obsolescence. Depreciation is commonly used in accounting to allocate the cost of a tangible asset over its useful life for tax and financial reporting purposes.
Financial Markets
Stock Market: A marketplace where buyers and sellers trade shares of ownership in publicly-listed companies. Prices of stocks are determined by supply and demand dynamics, and the stock market is a key component of the financial system.
Bond Market: A marketplace where debt securities, or bonds, are bought and sold. Bonds represent loans made by investors to entities, such as governments or corporations, and they pay periodic interest with the return of the principal at maturity.
Commodities Market: A market where physical goods, such as agricultural products, energy resources, and precious metals, are bought and sold. Commodities are standardized and interchangeable with other goods of the same type, and their prices are influenced by supply and demand factors.
Derivatives Market: A financial market where financial instruments derived from underlying assets are bought and sold. Derivatives include options, futures contracts, and swaps, and their value is derived from the performance of an underlying asset, index, or rate. They are used for hedging, speculation, and risk management.
Baking and Financial Institutions
Bank: A financial institution that accepts deposits from the public and creates credit by lending funds. Banks provide a range of financial services, including checking and savings accounts, loans, and investment products.
Credit Union: A cooperative financial institution owned and operated by its members. Credit unions provide similar services to banks, including savings and loan products, but they are generally focused on serving a specific community or group of individuals.
Investment Bank: A financial institution that provides a range of services, primarily in the areas of capital raising, mergers and acquisitions, and securities trading. Investment banks assist companies in raising funds through the issuance of stocks and bonds and provide advisory services for complex financial transactions.
Brokerage: A financial institution or individual that facilitates the buying and selling of financial securities on behalf of clients. Brokerages may be traditional (offering full-service brokerage with advice) or discount (providing a platform for self-directed trading). They play a crucial role in financial markets by executing trades and providing market-related information.
Accounting and Reporting
Balance Sheet: A financial statement that provides a snapshot of a company’s financial position at a specific point in time. It shows the company’s assets, liabilities, and shareholders’ equity, illustrating the fundamental accounting equation: Assets = Liabilities + Equity.
Income Statement: A financial statement that summarizes a company’s revenues and expenses over a specific period. Also known as a profit and loss statement, it shows the net profit or loss generated by the company during the reporting period.
Cash Flow Statement: A financial statement that details the cash inflows and outflows of a company over a specified period. It consists of three sections: operating activities, investing activities, and financing activities, providing insights into the sources and uses of cash.
Forecasting: The process of estimating future trends or outcomes based on historical data and analysis. In business and finance, forecasting is commonly used for budgeting, financial planning, and decision-making.
Payables: Amounts that a company owes to its creditors or suppliers. Payables are typically classified as current liabilities on the balance sheet and represent obligations to pay for goods or services.
Receivables: Amounts that a company is owed by its customers or clients. Receivables are assets recorded on the balance sheet and represent amounts to be collected from customers for goods or services provided on credit.
Financial Ratios: Quantitative metrics calculated from financial statements that provide insights into a company’s performance and financial health. Examples include liquidity ratios (e.g., current ratio), profitability ratios (e.g., return on equity), and leverage ratios (e.g., debt-to-equity ratio). These ratios help analyze and compare financial performance across different companies and industries.
Investment Vehicles
Mutual Funds: Investment vehicles that pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other securities. Managed by professional fund managers, mutual funds offer investors an opportunity to access a diversified portfolio with relatively low investment amounts.
Exchange-Traded Funds (ETFs): Investment funds that are traded on stock exchanges, similar to individual stocks. ETFs typically track an index, commodity, bonds, or a basket of assets, providing investors with diversification and the flexibility of trading throughout the day at market prices.
Real Estate Investment Trusts (REITs): Companies that own, operate, or finance income-generating real estate across various sectors, such as residential, commercial, or industrial properties. REITs allow investors to invest in real estate without having to directly own physical properties. They often provide dividends to shareholders based on the rental income generated by the underlying real estate assets.
Build a Solid Financial Foundation
Having a basic understanding of these terms, or at least the knowledge to refer back to them as you come across them, will take you far on your financial journey. It’s easy to throw your hands up and give up when you are dealing with terms that are foreign or confusing to you. Having this list of terms is sure to empower you to make the smartest financial decisions possible, wherever you are on your financial journey. If you would like to do more to put your financial future in your own hands, Denison Edge offers a variety of finance credential courses that you can browse and register for on our website here.