One of the best ways to improve your financial knowledge is to know the basic financial terms and their meanings. Here, we have a financial dictionary of the most used financial words. Understanding the same will elevate your knowledge and allow you to make better decisions for a secure financial future.
Important Financial Terms to Know: Basic, Medium, and Advanced
We categorize financial terms and definitions into three categories: basic, medium, and advanced. Knowing these can significantly improve your understanding of this field and help in financial decision-making,
Basic Financial Terms
Loan
A loan is an amount of money you borrow and then repay to the lender along with the interest within a pre-determined period. You can take a secured or an unsecured loan. A secured loan is when you submit collateral or security, and an unsecured loan is one that does not need collateral. To apply for a loan, you should write to a lending organization, provide your personal and financial details, etc. The lenders will approve or reject your loan depending on your credit report, income, employment, etc.
Rate of Interest
As mentioned earlier, the lender provides a loan to the borrower and charges interest in return. Interest is an amount that the individuals pay to the lending institution in return for money. Your interest rate is based on the ongoing market interest rate, your credit score, and other factors.
Liability
A liability is a sum of money that you owe like bank loans, credit card debts, etc. Some liabilities are monthly dues, while some are yearly. There are long-term liabilities, too, like leases.
Budget
Individuals and businesses develop budgets by including several factors like income, assets, liabilities or dues, spending, etc. Using a budget, you know how much money you can afford to spend without disturbing other necessities. It helps you make financial decisions for the future.
Investment
An investment is when you put your money, hoping for a return or profit. So, an investment is a part of your saving that aims to create more value or money. You can invest money into stocks, bonds, property, gold, etc., and hope that their value increases over time.
Collateral
It is a security presented to the lender in return for a loan. If the debtor does not pay the dues, the lender can seize the collateral and sell it to recover the remaining loan amount.
Medium -Level Financial Terms
Credit
Credit is an agreement between a lender and a borrower, where the former extends funds to the latter. The borrower takes the credit and repays the same later. The borrower is known to have good credit when they repay the credit amount responsibly and timely.
Credit Card
A credit card allows you to make purchases on credit. If you have a credit card, you can purchase goods without paying cash. You use the card to pay the money until you reach the credit limit.
Credit Score
A credit score is a number that suggests the individual’s reliability. A high score means that the borrower has been particular in repaying their dues in full and timely. The credit score is based on repayment of the dues, credit usage rate, credit mix, and more.
Balance sheet
A balance sheet is one of the essential financial statements listing the organization’s assets, liabilities, etc. It reflects the financial standing of the company by listing the assets on one side and liabilities on the other.
Assets
Assets are the items you have, like cash, stock, properties, office machinery or equipment, accounts receivables, etc.
Stocks
Stocks are the shares of a company. Companies sell stocks to raise funds and launch a new product, pay debts, expand business, etc. Buying a stock is an investment as the stock value increases over time. You can sell the stocks when they rise in value and make a profit or enjoy the dividend/earnings of the company’s revenue growth.
Bonds
Bonds are debt investments or fixed-income securities. When you buy a bond, you allow an organization to borrow money for a certain time. Then, you get repaid with interest.
Mortgage
A mortgage is a property loan. You can take a mortgage from banks or financial institutions. To repay the mortgage, you should make regular payments. The mortgage lender charges you interest. The property is the collateral, which can be seized if you default on your payment.
Advanced-Level Financial Terms
Now comes the advanced level dictionary to make you financially pro.
Amortization
Amortization is when the borrower repays the dues in regular installments. The period is pre-defied. The amortization depends on the total loan amount, interest rate, loan term, etc. You can pay amortization monthly, including the interest and remaining loan amount.
EBITDA
EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, is the ability of an organization to generate a cash flow. You can calculate EBIDTA for your business by summing up net profit, interest, taxes, depreciation, and amortization.
Accounts Receivable
Accounts receivable are the money that businesses get from the clients for offering them products and services. When the business makes a sale but does not get paid, it prepares bills and records account receivables as assets.
Accounts Payable
Accounts payable is the money that a business pays for using the goods or services. So, the business purchases materials on credit but does not pay for them immediately; rather, it records the same under accounts payable as liabilities.
Bookkeeping
It is a record of everyday financial transactions. It is recorded in a document. If a business wants to get accurate and updated financial information about its company, it can check bookkeeping.
Bootstrapping
When business owners start the venture on their own without borrowing or taking a loan, it is bootstrapping. So, they invest their own money in the company by performing the dual role of investor and business owner.
Wrapping Up
Knowing financial terms can improve your financial health. Use your finance knowledge to make informed decisions about taking loans, planning an investment, improving your credit score, etc. Also, if you are in the same professional domain, the knowledge of these terminologies can set you apart when you meet industry experts and new investors. You can also stay updated on the current economic events, etc.
FAQs
1. Why is it important to know financial terms?
Ans. Knowing finance terms improves your financial knowledge and health, helps you plan an investment, assists you in improving your credit score, etc.
2. What is a credit score?
Ans. A credit score is your creditworthiness or reliability. A high score means that the borrower has been particular in repaying their dues in full and timely.
3. What is a mortgage?
Ans. A mortgage is a type of property loan. The banks or financial institutions provide the same to the borrowers, who make repayments with interest.
4. What is Bootstrapping?
Ans. When business owners start the venture on their own without borrowing or taking a loan, it is bootstrapping.
5. How do stocks and bonds differ?
Ans. Stocks are company shares, which you can sell and make a profit or collect dividends or interest as earnings. Bonds are debt investments or fixed-income securities. You get interest on the bond, too.