While learning languages there are always key terms that will come up over and over again. If you master those then you can rely on context clues to fill in the gaps. Financial language is no different.
Here are key terms that will allow you to understand 90% of the lingo used and allow you to be fluent in financial conversations.
Economics
Inflation
General increased in prices due to the decline of purchasing power of your money. If inflation goes up, prices are increasing and thus your $1 doesn’t buy as much.
E.g. In 1990 an average cup of coffee cost $0.70. In 2015 that same average cup of coffee rose to $2.70
Gross
Before taxes
Net
After taxes
Principal
The original amount
Shareholder
Partial owner of something. Often a share of stock.
Budgeting
Cash flow
Money coming in vs money going out.
Free cash flow
Residual/Left over cash flow, after subtracting money going out.
Income Statement / Budget (Also commonly know as a PNL - Profit-N-Loss)
Summary of cash flows. This shows what is coming in (revenue) vs going out (expenses)
Liquidity
Access to cash on hand or an investment that can quickly be turned into cash. High liquidity means there is plenty of cash available.
Accounting
Assets
What you own
Liabilities
What you owe
Balance Sheet / Net Worth Statement
Summary of all assets & liabilities. This shows what you own (assets) and what you owe (liabilities)
Cost Basis
What you paid for something
Capital Gains / Capital Losses
The difference between what you paid for something (cost basis) and what it is worth now (profit/loss).
Leverage
The use of debt in an attempt to amplify returns. Highly leveraged means that a company or person has a lot of debt.
Investing
Diversification
Spreading your assets into different investments.
Allocation
How you have spread your assets into a different investments.
Stocks
Partial ownership in a company. If you own a stock you are a shareholder as you hold shares of that stock.
Equity / Equities -
Equity - Ownership stake
Equities - Shares of ownership. Stocks, mutual funds, exchange-traded funds (ETF), and more fall into this category as they represent ownership in companies.
Bonds
Debt owed by a company or government. They generally have a fixed interest rate and time period.
Dividend
Distribution of a company’s earnings to shareholders
Yield
Income an investment pays out to the investor, expressed as a percentage (%). For most, this is received as interest or dividend payments.
Volatility
How much something goes up and down in price. High volatility means it moves up and down by large amounts.
Return
The amount gained or lost on an investment. Shown either as a total or annualized (% per year) percentage.
For the Overachievers
Investopedia is a great resource for all things financial lingo. Here is a link to their dictionary. You can even sign up for their ‘Term of the Day’ newsletter that sends you a term a day. Note - they sometimes take deep dives into arcane terms.
Arcane
Understood by few; mysterious or secret
Now you have the basics. Check out the rest of my posts to start learning more.
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