Financial Terms Glossary
Financial jargon doesn’t have to be difficult or confusing. Let’s keep it simple. This glossary is here to break down financial terms in a clear and easy-to-understand way.
Click on the term you’re interested in and a toggle will open up with the explanation.
If you have any other terms you think should be included, feel free to reach out through the Contact page.
A
Assets
Definition:
Anything valuable that a person or business owns.
Explanation:
Assets are anything you own that has value and can help you financially. This can include big things like your home or car, as well as your savings, investments, or even personal items like jewelry. If it’s something you can sell or use to build your wealth, it’s considered an asset.
Assets are important when looking at your overall financial picture because they show what you have that adds to your net worth.
Why It Matters:
Knowing what assets are and what assets you own is important for growing your wealth and feeling financially secure.
B
Bonds
Definition:
A type of debt where investors loan money to an organization (usually a company or government) in exchange for regular interest payments and the return of their original investment.
Explanation:
Bonds are essentially loans that you give to a company or government. When you buy a bond, you’re lending your money to them for a certain period, and in return, they promise to pay you back the full amount plus interest. It’s like being a bank for a bit!
Bonds are generally seen as a safer investment compared to stocks because they provide more stable returns. You’ll usually get regular interest payments, known as coupon payments, until the bond matures, at which point you get your initial investment back. They can be a great way to earn steady income and balance out the risks of stock investments.
Why It Matters:
Bonds offer a lower-risk way to invest your money.
C
Capital Gains
Definition:
The money you make when you sell something, like stocks or real estate, for more than what you paid.
Explanation:
Capital gains are the profit you receive when you sell something for more than you originally paid for it. It could be stocks, real estate, or any other investment. If you bought some shares in a company for $100, and later you sell them for $150. That $50 difference? That’s your capital gain – it’s the money you gained by selling your investment for a higher price than what you originally spent.
It’s important to know that capital gains can be taxed, so depending on how long you held onto the investment, you might owe the IRS a portion of that profit. But the good news is, when your investments grow over time, those gains can help you build wealth.
Why It Matters:
Knowing how capital gains work helps you understand your tax obligations.
Compound Interest
Definition:
Interest that’s earned on both the original amount you invested and the interest that has built up over time.
Explanation:
Compound interest allows you to grow your money faster than regular, or “simple,” interest. With compound interest, instead of just earning interest on the money you put in (your principal), you earn interest on both your principal and the interest you’ve already earned. It causes a snowball effect – the longer your money sits and earns interest, the bigger it grows.
Why It Matters:
Over time, it can boost the growth of your investments or increase the amount you owe on debt.
Credit Score
Definition:
A number that shows how reliable someone is with managing credit.
Explanation:
A credit score is a number that shows how trustworthy you are when it comes to managing debt. It’s based on things like your payment history, the amount you owe, and how long you’ve had credit. Lenders use this score to decide whether to give you loans or credit cards, and it can even impact the interest rate they offer you.
Think of it as a financial report card – higher scores make it easier to get approved for credit, while lower scores might make borrowing tougher.
Why It Matters:
A higher score increases your chances of getting loans at favorable terms.
D
Dividends
Definition:
A share of a company’s profits that’s given to its shareholders.
Explanation:
Dividends are like little rewards companies give to their shareholders. If you own stock in a company, they might share a portion of their profits with you as a dividend. Think of it as a thank-you for investing in their business. These payments can come in the form of cash or more shares of stock, and they’re usually sent out regularly – e.g. once a quarter or a couple times a year.
Not all companies pay dividends, but for those that do, it’s a nice way to earn some extra income while your investment hopefully grows over time.
Why It Matters:
Dividends give investors a steady stream of income.
E
Exchange-Traded Funds (ETFs)
Definition:
Investment funds that are traded on stock exchanges, just like stocks, and hold a mix of assets such as stocks, bonds, or commodities.
Explanation:
ETFs, or Exchange-Traded Funds, are a type of investment that lets you buy a whole group of assets – like stocks or bonds – all at once. Instead of choosing individual stocks, an ETF gives you a mix of different investments bundled together, which helps spread out your risk.
You can trade ETFs on the stock market just like a regular stock, and they usually have lower fees.
Why It Matters:
ETFs provide an affordable way to diversify your investments.
F
Financial Literacy
Definition:
The know-how and skills to make smart, informed choices with your money.
Explanation:
Financial literacy is all about knowing how to manage your money well. It means understanding basics like budgeting, saving, investing, and handling debt. When you’re financially literate, you feel more confident making money decisions – whether that’s creating a budget, saving for big goals, or planning for retirement.
Being financially literate isn’t about being a math whiz or a finance expert; it’s about having the skills and knowledge to make smart choices with your money. And the best part? It’s something anyone can learn, one step at a time.
Why It Matters:
Financial literacy gives you the confidence to handle your money well, make good financial decisions, and build toward a stable and secure future.
G
H
I
Interest Rate
Definition:
The percentage a lender charges you for borrowing money.
Explanation:
An interest rate is the cost of borrowing money or the reward for saving it. When you take out a loan, like a mortgage or a car loan, the interest rate is what the lender charges you for borrowing their money, usually expressed as a percentage. So, if you borrow $1,000 with a 5% interest rate, you’ll pay back $1,050 after a year.
On the flip side, if you put your money in a savings account, the bank pays you interest for keeping your money there. A higher interest rate means you’ll earn more on your savings or pay more on your loans. Understanding interest rates is important because they can really impact your finances.
Why It Matters:
Interest rates affect how much it costs to borrow money and how much you earn on your savings.
J
K
L
M
Mutual Funds
Definition:
Funds that gather money from many investors to invest in a mix of stocks, bonds, or other assets.
Explanation:
A mutual fund is like a big pot of money that’s collected from many different investors. This money is then invested in a mix of stocks, bonds, or other assets chosen by a professional manager. When you buy into a mutual fund, you own a small piece of all those investments.
Mutual funds are a popular choice because they let you diversify your investments easily without needing to pick each stock or bond yourself. They can be a great option if you want a hands-off way to invest your money and let a professional handle the details.
Why It Matters:
Mutual funds offer an easy way to invest without having to choose individual stocks yourself.
N
Net Worth
Definition:
The overall value of what you own after subtracting what you owe.
Explanation:
Net worth is a simple way to measure your financial health. It’s the total value of everything you own, like your house, car, and savings, minus what you owe, like loans or credit card debt. So, if you add up all your assets (what you own) and subtract your liabilities (what you owe), you get your net worth.
Net Worth = Assets – Liabilities
Think of it as a snapshot of your financial situation. A positive net worth means you have more assets than debts, which is a good sign! It’s a helpful number to track over time as you work towards your financial goals.
Why It Matters:
Net worth is a snapshot of your overall financial health.
O
P
Pension
Definition:
A retirement plan that gives you a monthly income after you retire, usually based on how long you worked and your salary.
Explanation:
A pension is a retirement plan that provides you with a steady income after you stop working. When you work for a company that offers a pension, a portion of your salary is typically set aside and invested over the years. Once you retire, you receive regular payments from that fund, which can help cover your living expenses.
Pensions are great because they give you financial security in your golden years, allowing you to enjoy retirement without worrying too much about money. Just remember that the amount you get can depend on factors like how long you worked there and your salary history.
Why It Matters:
Pensions offer financial peace of mind during retirement.
Q
R
Risk Tolerance
Definition:
The amount of ups and downs in investment returns that you’re comfortable handling.
Explanation:
Risk tolerance is about how comfortable you are with taking risks when it comes to your money. It reflects your ability and willingness to handle the ups and downs of investing. Some people are okay with taking big risks for the chance of higher returns, while others prefer to play it safe and stick with more stable investments.
Your risk tolerance can depend on factors like your age, financial goals, and personal experiences. It’s important to know your own risk tolerance because it helps you choose the right investments that match your comfort level, so you can feel confident about your financial decisions.
Why It Matters:
Knowing your risk tolerance is key to choosing investments that match your financial goals and how comfortable you are with market ups and downs.
S
Stocks
Definition:
Shares that represent your ownership stake in a company.
Explanation:
Stocks are a way to own a piece of a company. When you buy a stock, you’re purchasing a small share of that company, which means you get to be a part of its success. If the company does well and makes a profit, the value of your stock can go up, and you might even receive dividends as a bonus.
On the flip side, if the company struggles, the value of your stock can drop. Think of it like being a partner in a business – you share in the gains and the risks. Investing in stocks can be a great way to grow your wealth over time, especially if you’re in it for the long haul.
Why It Matters:
Stocks can provide the chance for great returns, but they also come with risks.
T
Total Return
Definition:
The total return on an investment, which includes profits from selling, dividends, and interest earned.
Explanation:
Total return is the complete amount of money you make from an investment over a certain period. It includes not just the profits from selling the investment, but also any income you earn from it, like dividends or interest.
For example, if you buy a stock for $100, it rises to $120, and you also receive $5 in dividends during that time, your total return would be $25. It’s a helpful way to look at how well your investment is performing because it gives you the full picture of what you’re earning.
Why It Matters:
Total return provides a complete picture of how an investment is doing, which is important for planning your long-term finances.