Navigating your finances can feel overwhelming, especially if you’re not familiar with all the jargon. It doesn’t matter if you’re fresh out of school, looking to invest for the first time, or just trying to make smarter decisions with your money—understanding the basics of finances is helpful. Knowing how your choices affect your wallet and being able to talk about those choices can make a big difference in your daily life and help you manage your money better.
This cheat sheet defines several foundational financial terms to help you learn to speak the language of Finance.
Investment Terms:
Alternative Investments: Alternative investments, also called alternative assets, are asset classes that aren’t stocks, bonds, or cash. They differ from traditional investments because they aren’t easily sold or converted into cash.
Annuity: An annuity is an investment type in which the purchaser obtains the right to receive a fixed amount each year for a lifetime or for a certain period.
Asset Allocation: Asset allocation refers to how you spread your money across different investment types—also called asset classes.
Asset Classes: Asset classes are different types of investments grouped by qualities, laws, and regulations. These include:
- Bonds: Bonds represent a form of borrowing. When you buy a bond—typically from the government or a corporation—you’re essentially lending them money. You receive periodic interest payments and get back the loaned amount at the time of the bond’s maturity—the defined term at which the bond can be redeemed.
- Stocks: A stock is a share of ownership in a public or private company. When you buy stock in a company, you become a shareholder and can receive dividends—the company’s profits—if and when they’re distributed.
Cash and Cash Equivalents: This refers to any asset in the form of cash, or one that can be converted to cash easily if necessary.
Capital Gain: A capital gain is an increase in the value of an asset or investment above the price you initially paid for it. If you sell the asset for less than the original purchase price, that would be considered a capital loss.
Capital Market: This is a market where buyers and sellers engage in the trade of financial assets, including stocks and bonds. Capital markets feature several participants, including:
- Companies: Firms that sell stocks and bonds to investors
- Institutional Investors: Investors who purchase stocks and bonds on behalf of a large capital base
- Mutual Funds: A mutual fund is an institutional investor that manages the investments of thousands of individuals.
- Hedge Funds: A hedge fund is another type of institutional investor, which controls risk through hedging—a process of buying one stock and shorting a similar stock to make profit from the difference in their relative performance.
Compound Interest: This refers to “interest on interest.” When you’re investing or saving, compound interest is earned on the amount you deposited, plus any interest you’ve accumulated over time. While it can grow your savings, it can also increase your debt; compound interest is charged on the initial amount you were loaned, as well as the expenses added to your outstanding balance over time.
Distress Investing: Distress investing, also called distressed debt investing, is an investment strategy that targets financially distressed companies, with the intent of controlling the restructuring process or being paid off not to intervene with the restructuring process.
Diversification: Diversification is the process in which investors diversify their holdings by investing in several companies across different industries to reduce risk from pricing volatility, rather than owning stock in a single company.
Dividend: A dividend is cash paid to shareholders on a per-share basis to distribute a portion of the free cash generated by a business.
Fundamental Investing: Fundamental investing is an investment strategy based on selectin overpriced or underpriced stocks based on deep analysis of the value of the underlying company.
Impact Investing: Impact investors intentionally invest in innovative solutions that can potentially create environmental or social impact in a measurable way (for example, low-carbon cement to help combat climate change). Some are willing to accept lower returns in exchange for greater impact.
Interest Rate: Interest rate is the percentage rate paid over a period of time for debt owed by a company (in the form of loans, bonds issued, or notes) and for assets in cash equivalent accounts (for example, savings or treasury bills).
Organic Investments: Organic investments are investments within the company, often in its expansion.
Quantitative Investing: Quantitative investing is a hedge fund strategy that uses computing power to automatically invest based on algorithms. Benefits can include speed and scalability.
Security: A security is a negotiable and tradable financial instrument that holds some type of monetary value. Three types of securities are:
- Equity: Equity security represents ownership interest held by shareholders in an entity, for example, capital stock.
- Debt: Debt security is borrowed money that must be repaid according to agreed-upon terms. Examples include government or corporate bonds and certificates of deposit.
- Hybrid: Combining some characteristics from equity and debt securities, hybrid securities include equity warrants, convertible bonds, and preference shares.
Sustainable Investing: Sustainable investing refers to a range of practices in which investors aim to achieve financial returns while promoting long-term environmental or social value.
Valuation: Valuation is the process of determining the current worth of an asset, company, or liability. If valuing a business, regularly repeating the process can be helpful so you can be ready if ever faced with an opportunity to merge or sell your company, or are trying to seek funding from outside investors.
Final Thoughts
By understanding the key terms outlined in our cheat sheet, you can navigate the financial landscape with greater confidence and clarity. Whether you’re setting up your first budget, planning an investment, or simply aiming to manage your money more effectively, knowing these terms will empower you to make informed decisions that positively impact your financial future. Keep this cheat sheet handy, and refer back to it as you continue your journey towards becoming fluent in the language of finance.
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