Finance Vocabulary: Key Terms to Know

Understanding finance requires a specific vocabulary. Here’s a breakdown of some essential terms:

Basic Concepts

• Assets: Anything of value that a person or company owns, such as cash, investments, real estate, or equipment.
• Liabilities: Debts or obligations that a person or company owes to others, such as loans, mortgages, or accounts payable.
• Equity: The difference between assets and liabilities; representing ownership in a company or property. (Also known as net worth)
• Revenue: The income generated from business activities, such as sales of goods or services.
• Expenses: Costs incurred in running a business, such as salaries, rent, and utilities.
• Profit: The difference between revenue and expenses; a measure of financial performance. (Also known as net income)

Investment Terms

• Stocks: Represent ownership in a company; also known as shares.
• Bonds: Represent a loan made to a company or government; the issuer promises to repay the principal plus interest.
• Mutual Funds: A collection of stocks, bonds, or other securities managed by a professional investment firm.
• Exchange-Traded Funds (ETFs): Similar to mutual funds, but traded on stock exchanges like individual stocks.
• Dividends: Payments made by a company to its shareholders, usually from profits.
• Capital Gains: The profit earned from selling an asset for more than its purchase price.
• Portfolio: A collection of investments held by an individual or institution.
• Risk Tolerance: An investor’s ability and willingness to lose money on investments.

Banking & Lending

• Interest Rate: The percentage charged on a loan or earned on an investment.
• Principal: The original amount of a loan or investment.
• Credit Score: A numerical representation of a borrower’s creditworthiness.
• Mortgage: A loan used to finance the purchase of real estate.
• APR (Annual Percentage Rate): The annual cost of borrowing money, including interest and fees.

Financial Statements

• Balance Sheet: A snapshot of a company’s assets, liabilities, and equity at a specific point in time.
• Income Statement: Reports a company’s financial performance over a period of time, showing revenue, expenses, and profit.
• Cash Flow Statement: Tracks the movement of cash both into and out of a company.

Economic Indicators

• Inflation: A general increase in prices and fall in the purchasing value of money.
• GDP (Gross Domestic Product): The total value of goods and services produced in a country.
• Unemployment Rate: The percentage of the labor force that is unemployed and actively seeking work.

This vocabulary provides a foundation for understanding financial news, making informed investment decisions, and managing personal finances effectively. Continued learning and research are essential for developing a more comprehensive understanding of the world of finance.