Finance Glossary: Essential Terms You Need to Know
A
Assets
Anything of value owned by an individual or company, such as cash, investments, real estate, and personal property.
Annual Percentage Rate (APR)
The yearly interest rate charged on borrowed money or earned through an investment, expressed as a percentage.
Amortization
The process of paying off a debt over time in regular installments of principal and interest.
B
Balance Sheet
A financial statement that shows a company's assets, liabilities, and shareholders' equity at a specific point in time.
Bonds
Debt securities issued by corporations or governments to raise capital, with a promise to pay back the principal along with interest.
Budget
A plan that outlines expected income and expenses over a certain period, used to manage finances and achieve financial goals.
C
Capital
Financial assets or resources that individuals or businesses use to fund operations and growth.
Credit Score
A numerical representation of an individual's creditworthiness, based on their credit history.
Compound Interest
Interest calculated on the initial principal and also on the accumulated interest from previous periods.
D
Debt
Money borrowed by one party from another, which must be repaid with interest.
Diversification
A risk management strategy that involves spreading investments across various financial instruments to reduce risk.
Dividend
A portion of a company's earnings distributed to shareholders, usually in the form of cash or additional shares.
E
Equity
The value of an owner's interest in an asset or business, calculated as the asset's value minus any liabilities.
Exchange-Traded Fund (ETF)
A type of investment fund that is traded on stock exchanges, much like stocks.
Expense Ratio
The annual fee that mutual funds or ETFs charge their shareholders, expressed as a percentage of the fund's assets.
F
Financial Statement
A formal record of the financial activities and position of a business, person, or other entity.
Fixed Interest Rate
An interest rate that remains constant for the duration of the loan or investment period.
401(k)
A retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck before taxes are taken out.
G
Gross Income
The total income earned by an individual or business before taxes and other deductions.
Growth Investing
An investment strategy focused on buying shares of companies expected to grow at an above-average rate compared to other companies.
H
Hedge Fund
An investment fund that employs various strategies to earn active returns for its investors, typically available only to accredited investors.
Home Equity
The value of a homeowner's interest in their home, calculated as the home's market value minus any outstanding mortgage balance.
I
Inflation
The rate at which the general level of prices for goods and services rises, eroding purchasing power.
Individual Retirement Account (IRA)
A retirement savings account that provides tax advantages for retirement savings.
Index Fund
A type of mutual fund or ETF designed to replicate the performance of a specific market index.
J
Joint Account
A bank account or investment account shared by two or more individuals, typically with equal access to the funds.
Junk Bonds
High-yield, high-risk bonds typically issued by companies with lower credit ratings.
K
Keogh Plan
A tax-deferred retirement plan for self-employed individuals and small businesses.
Kiting
A form of check fraud that involves writing a check against an account with insufficient funds, then covering it with another check from a different account.
L
Liabilities
Financial obligations or debts owed by an individual or company to others.
Liquidity
The ease with which an asset can be converted into cash without affecting its market price.
Long-Term Investment
An investment held for an extended period, typically longer than one year, to achieve long-term financial goals.
M
Market Capitalization
The total market value of a company's outstanding shares of stock, calculated by multiplying the stock price by the number of shares.
Mutual Fund
An investment vehicle that pools money from many investors to purchase a diversified portfolio of securities.
Mortgage
A loan used to purchase real estate, where the property serves as collateral for the loan.
N
Net Income
The total earnings of an individual or business after taxes and other deductions have been subtracted from gross income.
Net Worth
The total value of an individual's or company's assets minus liabilities.
Nominal Interest Rate
The interest rate before adjusting for inflation.
O
Option
A financial derivative that gives the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price within a specific period.
Overdraft
A deficit in a bank account caused by drawing more money than the account holds.
P
Portfolio
A collection of financial investments, such as stocks, bonds, and other assets, held by an individual or institution.
Principal
The initial amount of money invested or loaned, excluding any interest or earnings.
Private Equity
Investments in companies that are not publicly traded on a stock exchange.
Q
Qualified Dividend
A dividend that qualifies for a lower tax rate than ordinary income.
Quick Ratio
A measure of a company's ability to meet its short-term obligations with its most liquid assets, calculated as (current assets - inventories) / current liabilities.
R
Return on Investment (ROI)
A measure of the profitability of an investment, calculated as the net profit divided by the initial investment cost.
Recession
A period of temporary economic decline, typically identified by a fall in GDP in two successive quarters.
Risk Tolerance
An individual's willingness and ability to take financial risks.
S
Savings Account
A bank account that earns interest on the deposited funds and is typically used for short-term savings.
Stock
A type of security that represents ownership in a corporation and entitles the shareholder to a portion of the company's profits and assets.
Savings Bond
A government bond offered to the public as a means of raising funds, typically with a fixed interest rate.
T
Tax-Deferred
An investment or savings plan that allows earnings to accumulate tax-free until they are withdrawn.
Treasury Bonds
Long-term, fixed-interest government debt securities with maturities of more than 10 years.
Trust Fund
A legal arrangement in which a trustee holds and manages assets on behalf of a beneficiary.
U
Underwriting
The process by which an individual or institution takes on financial risk for a fee, typically used in the context of insurance and securities issuance.
Unsecured Loan
A loan that is not backed by collateral, relying on the borrower's creditworthiness to secure the loan.
V
Venture Capital
Financing provided to startups and small businesses with high growth potential in exchange for equity or partial ownership.
Volatility
A statistical measure of the dispersion of returns for a given security or market index, often associated with the level of risk.
W
Wealth Management
A comprehensive service that includes financial planning, investment management, and other financial services to help individuals manage their wealth.
Working Capital
The difference between a company's current assets and current liabilities, indicating its short-term financial health.
X
Ex-Dividend
The date on which a stock begins trading without the value of its next dividend payment.
Y
Yield
The income return on an investment, such as the interest or dividends received, usually expressed as an annual percentage of the investment's cost or current market value.
Z
Zero-Coupon Bond
A bond that does not pay periodic interest payments and is sold at a discount to its face value, with the full face value repaid at maturity.
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