A Glossary of Common Financial Terms

Navigating the world of finance can feel like learning a new language. This is a short dictionary of key financial terms designed to help you understand the jargon and make more informed decisions.

Assets

Assets represent anything of economic value that a person, company, or organization owns or controls with the expectation that it will provide future benefit. Examples include cash, investments, real estate, and equipment.

Liabilities

Liabilities are obligations or debts that a person, company, or organization owes to others. Examples include loans, accounts payable, and mortgages. Liabilities represent a claim on the assets.

Equity

Equity represents the owner's stake in a company or asset, calculated as the difference between assets and liabilities. It's often referred to as net worth.

Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and consequently, the purchasing power of currency is falling. It's usually expressed as a percentage.

Interest Rate

The interest rate is the cost of borrowing money, expressed as a percentage of the principal amount. It's the price a lender charges for the use of their assets by a borrower.

Investment

An investment is the purchase of an asset with the expectation that it will generate income or appreciate in value in the future. Common investments include stocks, bonds, and real estate.

Stock (Share)

A stock, also known as a share, represents a unit of ownership in a corporation. Stockholders are entitled to a portion of the company's assets and earnings.

Bond

A bond is a debt instrument issued by a corporation or government to raise capital. Investors who purchase bonds are essentially lending money to the issuer and receive interest payments in return.

Portfolio

A portfolio is a collection of investments held by an individual or institution. A well-diversified portfolio can help to reduce risk.

Diversification

Diversification is a risk management strategy that involves spreading investments across a variety of assets to reduce the impact of any single investment performing poorly. This helps mitigate unsystematic risk.

Risk

In finance, risk refers to the uncertainty surrounding the potential returns of an investment. Higher potential returns typically come with higher risks.

Volatility

Volatility is a measure of the price fluctuations of an asset or market over a period of time. High volatility indicates that the price can change dramatically in either direction.

Liquidity

Liquidity refers to the ease with which an asset can be bought or sold without significantly affecting its price. Cash is the most liquid asset.

Yield

Yield refers to the income return on an investment, usually expressed as a percentage of the current market price. For example, the dividend yield on a stock represents the annual dividends paid per share divided by the share price.

This is just a starting point. The world of finance is vast and constantly evolving. Continuing to expand your financial vocabulary is crucial for effective financial planning and decision-making.