When you start managing your own money and don’t have a financial advisor or parent to be asking when you’re confused, it can leave a big question mark over your head concerning what different terms mean. In this article, I will explain the most basic financial terms you should know as a student.
Personal Finance Terms
Personal finance terms are an important part of finance. When you learn about personal finance terms, it will become easier to understand how to read a financial statement and handle your finances effectively.
Banking And Credit Terms
Most people are never taught how important it is to understand banking and credit terms. The average person doesn’t pay attention or understand many financial details. With the Internet and credit cards becoming more and more popular, it is important that people understand these basics. However, many people have no idea of how important this is.
● Credits total amount of funds a person or business can borrow from a financial institution
● Dependent A person who is financially dependent on your income.
● Compound Interest: is when you earn interest on both the money you've saved and the interest you earn.
● Net Worth: Your net worth is simply the difference between your assets (what you own) and liabilities (what you owe).
● Term Life Insurance: Term life insurance guarantees payment of a stated death benefit to the insured's beneficiaries if the insured person dies during a specified term.
● Cash Flow: Cash Flow is an indicator of where cash is flowing through a business and how efficiently it’s being used.
● Liability: in basic terms liability are anything that takes money out of your pocket.
● Capital Gains: Capital gains are the difference between how much something is worth now versus how much it was originally purchased for.
Investing Terms involve the use of capital (money) rather than resources in order to accomplish a financial goal. There are many different investment terms that general investors use depending on their circumstances.
● Assets: An asset is something containing economic value and/or future benefit, it also can often generate cash flows in the future
● Asset Allocation: Asset Allocation is the process of selecting financial assets with the goal of improving performance
● Stocks: is a type of investment that represents an ownership share in a company.
● Bonds: A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental).
● Internal Rate of Return (IRR) is the annual rate of growth investment is expected to generate.
The Bottom Line
Like anything else in life, learning how financial markets work takes time. Adopting the easier approach by maintaining a level of ignorance can be dangerous, especially when it is the company’s prerogative to boost investor confidence by using as many positive values as possible. Knowing what each term means, why it is being used, and understanding how it affects stock price are just a few ways beginners can better understand the financial markets and critical-thinking skills when it comes to financial news.