Common Financial Terms and Their Definitions

Understanding financial terminology is essential for managing personal finances, investments, or business operations. Below is a list of key financial terms and their definitions:

General Financial Terms

• Loan: A sum of money borrowed that must be repaid, often with interest, over a specified period.
• Interest: The cost of borrowing money, expressed as a percentage of the loan amount. It can also refer to earnings from savings or investments.
• Compound Interest: Interest calculated on the initial principal and the accumulated interest from previous periods, allowing investments or debts to grow faster.
• Credit: Money received or the ability to borrow money under agreed terms. It includes credit cards, credit limits, and credit scoring systems.
• Liability: Any financial obligation or debt owed by an individual or entity.

Investment Terms

• Stocks: Shares of ownership in a company that investors purchase to earn dividends or capital gains when sold at a higher price.
• Bonds: Fixed-income securities representing loans made by investors to entities like governments or corporations. Bonds pay periodic interest and return the principal at maturity.
• Mutual Fund: A professionally managed portfolio of investments divided into shares for individual investors.
• Diversification: Spreading investments across various assets to reduce risk.

Business and Accounting Terms

• Assets: Items owned by an individual or business that provide future economic benefits, such as cash, property, or equipment. Assets can be classified as current (convertible to cash within a year) or fixed (long-term use).
• Balance Sheet: A financial statement showing a company’s assets, liabilities, and equity at a specific point in time.
• Cash Flow: The net movement of cash into and out of a business. It can be categorized into operating, investing, and financing cash flows.

Real Estate and Loans

• Mortgage: A loan used to purchase property, where the property serves as collateral for the loan. Payments include principal and interest over time.
• Amortization: The gradual repayment of a loan through scheduled payments that cover both principal and interest.

Taxation and Gains

• Capital Gains: The profit earned from selling an asset at a price higher than its purchase cost. Capital gains are subject to taxation in many jurisdictions.
• Capital Gains Tax: A tax levied on profits from the sale of certain assets.

Savings and Inflation

• Money Market Account: A type of savings account offering higher interest rates but requiring higher minimum deposits and limiting transactions.
• Inflation: The rate at which the general level of prices for goods and services rises, reducing purchasing power over time.

Financial Planning Tools

• Budget: A plan outlining expected income and expenses over a specific period to manage finances effectively.
• Net Worth: Calculated as total assets minus total liabilities; it represents an individual’s financial health.

This glossary provides foundational knowledge for navigating personal finance, investments, and business operations effectively.