20 Key Financial Terms
Asset allocation: Asset allocation is the process of determining which assets you want to hold your money in: cash, stocks, bonds. These choices are personal to the investor and influence how your investment portfolio looks.
Bonds: Companies and governments can issue bonds when they need large amounts of money to fund projects and operations. Investors then provide loans to the companies and governments, which is then returned to them with interest, incrementally.
Budgeting: Budgeting is crucial, especially for young adults who have just started earning a salary or getting an allowance. Budgeting is creating a plan on what amount of your income to save and how much to spend. It is simply creating a balance between income and expense.
Capital gains: Capital gains are when you sell an asset for a greater price than what you got it for. You typically have the best chances for capital gains when you hold your asset for more than one year. This is because it is considered a long-term gain, so it is taxed at a lower rate.
Capital market: Capital markets are financial markets that provide a space for investors, buyers, and sellers to trade stocks, bonds, shares, etc.
Centralised financial system: A centralized financial system is where one central party is in charge of authorizing and handling all transactions and investment plans. For example, a bank is an example of a centralized system since it is the middle man in authorizing our transactions.
Compounding interest: Compounding interest is the interest you earn on the money you saved and the interest you earned on top of that. For example, say you put $100 dollars in your bank account and earned 10% interest(interest will sadly never be this high). The first year you will earn 10% interest on the $100, which will leave you with $110 in your bank. Compounding interest means that the second year, you will earn 10% interest on the $110(in this scenario you aren’t adding any money to your bank account).
Current assets: Assets that are going to be convertible to cash in under a year. Examples of current assets are: inventories, cash and cash equivalents, prepaid expenses, etc.
Debt: Debt is when you owe something to someone else, usually in the form of money.
Decentralized finance: decentralized systems authorize transactions through blockchain technology. They don’t need a middle man, such as banks and brokerages, to authorize transactions. The transactions are completed without a central party by solely relying on technology.
Demand: Demand is the total amount of products or services people want to buy, for a certain price. Changes in demand and product availability directly affect the price of goods. For example, if there are more supplies and less demands, then the price of the goods will go down.
Fixed assets: Physical assets, such as property, that can be used for at least one year. This can then be sold or converted to cash.
Income: It is money that is earned on a constant basis, either through an occupation or investment.
Index Fund: Index funds is a diverse portfolio of stocks and bonds that mirror the risk and return of the market. The idea behind this is that the stock market has an overall upward trend so mirroring the stock market, or even a portion of it, should create a diverse portfolio that outperforms a single investment.
Interest Rate: An interest rate is the amount a borrower has to pay the lender on top of the money borrowed. The interest rate will stay constant even if the amount borrowed increases or if the time it takes to return the money increases.
Investing: Investing is putting money in places like bonds, stocks, cryptocurrencies, etc. to generate a profit. It is different from saving money since you're not holding it in an account to save, instead it is an effort to earn financial return.
Mutual Fund: Mutual funds are companies that accumulate money given to them by other people to invest. They then invest the money in a diversified portfolio, usually of bonds, stocks, shares, etc. The purpose of a mutual fund is that regular citizens can give their money to professional investors who can create a diversified portfolio that has a better potential of generating a greater income, than if they were doing it themselves.
Net Worth: Net worth is your total assets minus liabilities. Liabilities is the money you owe in mortgage, debt, etc.
Rebalancing: Rebalancing is altering your portfolio to make sure it aligns with your asset allocation vision and desired level of risk. This can be done through buying and selling assets until reaching your ideal portfolio.
Risk: Risk is the level of uncertainty you have while investing, which directly correlates to how much potential loss you are willing to chance.
