Making cents of financial jargons: a beginner’s guide

DDerek September 19, 2023 7:02 AM

Making cents out of financial jargons can be a daunting task for beginners. But don't worry, we're here to help! We will break down some of the most commonly used terminologies in the finance and investment world, and explain them in a way that even a novice can understand. So, let's get started.

Understanding financial jargons

In the world of finance and investment, jargons are ubiquitous. They are specialized words or phrases that are used to express complex financial concepts. These terms can be quite overwhelming for beginners who are just dipping their toes into the world of finance.

Here are some of the most commonly used financial jargons and their simple explanations:

  1. Asset: This is anything that has value and can be converted into cash. It can be a house, a car, stocks, bonds, etc.
  2. Liability: This is something that you owe. It can be a loan, a mortgage, credit card debt, etc.
  3. Equity: This is the value of an asset after subtracting the liabilities.
  4. Dividend: This is a payment made by a corporation to its shareholders, usually in the form of cash or additional shares.
  5. Capital gain: This is the increase in the value of an asset or investment.
  6. Capital loss: This is the decrease in the value of an asset or investment.
  7. Bear market: This is when the stock market is falling and pessimism is high.
  8. Bull market: This is when the stock market is rising and optimism is high.

Decoding finance terms

Now that we have covered some basic terms, let's delve deeper and decode some complex financial terms.

  • Compound interest: This is the interest on a loan or deposit that is calculated based on both the initial principal and the accumulated interest from previous periods. This is essentially 'interest on interest' and it can significantly increase your wealth over time.
  • Mutual fund: This is a type of investment vehicle that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities.
  • Exchange-traded fund (ETF): This is a type of investment fund and exchange-traded product that is traded on stock exchanges. ETFs are similar to mutual funds, but they can be bought and sold throughout the trading day like stocks.
  • Diversification: This is a risk management strategy that involves mixing a variety of investments within a portfolio. The rationale behind this is that a variety of investments will yield higher returns and pose a lower risk than any individual investment.

Financial jargons in the investment world

Here are some of the most important financial jargons in the investment world:

Jargon Explanation
Return on Investment (ROI) This is a measure used to evaluate the efficiency or profitability of an investment.
Risk Tolerance This refers to the amount of risk an investor is willing to take.
Portfolio This is the collection of all your investments.
Broker This is a person or firm that buys and sells securities on behalf of investors.

By understanding these terms, you will be one step closer to becoming financially literate and making informed investment decisions. Remember, finance doesn't have to be complicated.

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