In day to day life, we come across many financial jargons (or money jargons) when discussing with a colleague, through radio or TV commercials, in the newspaper or online. Do we know the meaning of at least the most commonly used terms? Some of us may get confused or feel dumb when we hear such money jargons. Here is an opportunity to get over it. You will find below some financial terms and their actual definition, some of them might even surprise you! It is always good to improve your financial health and knowing these terms will greatly help you in that process.
- Simple Interest
Simple interest is the interest that is obtained by multiplying the principal by the total number of days between payments by the daily rate of interest. This interest is not carried forward or added to the principal amount but is just paid out. Simple interest is the most easy and swift method for calculating the interest charged on any loan.
- Compound interest
Compound interest is the interest that is obtained after adding the previously earned interest to the principal amount so that the interest also earns interest. Compound interest increases your earnings exponentially because every new interest is based on the sum of the actual principal plus the last earned interest.
- Mutual fund
A mutual fund is a bag or collection of a variety of stocks or bonds. Through mutual funds, you can invest smaller amounts in different companies rather than investing a lump sum amount in one individual company stock. This makes it comparatively more accessible and less risky.
ETFs or exchange-traded funds are traded similar to stocks in a stock market. ETF is also similar to mutual fund as value depends on the performance of a specific index. However, ETF differs from mutual fund because the price of any ETF keeps changing throughout the day as they are continuously bought and sold.
- Asset allocation
The method of distributing your investment in various sectors such as stocks, bonds, cash, mutual funds, and real estate is called asset allocation. This helps is not just minimizing the risk factor, but it also maximizes the chances of increasing the returns on your investment.
Diversifying is the method of dividing your investments into many different subcategories under each sector of your investment in order to lower your risk. You can achieve this by mixing up various investments within your portfolio. If you put all your money in just one stock, then you are more likely to face heavy loss if that particular stock doesn’t do well. For example, if you are investing in stocks, then make sure to have a mix of large cap, mid cap, small cap or other different sectors included in your in your portfolio.
The process of shuffling or reallocating your portfolio depending on the performance of the stocks or funds is called rebalancing. You might buy or sell your stocks or bonds in accordance with their performance and also with respect to your financial goal.
APR or annual percentage rate is a term that is always confused with the interest rate. They are not the same but are somewhat related. The interest rate is the amount charged to borrow money from a lender. However, APR includes interest rates, commission and other charges and fees on the borrowed amount. APR will be higher than the common interest rate. For example, a home loan APR will include initial processing fee, closing fee, and any discounts if applicable apart from the fixed or floating interest rate on the loan amount.
- Credit score
A credit score is a number (usually three-digit) assigned by a credit-reporting company that predicts the probability of a person repaying a loan or credit card charge. It represents a person’s creditworthiness. A score is not the same as a credit report. A credit report is a detailed statement of one’s credit history. Credit score determines your chances of getting money and the interest rate for the loan amount from a lender.
- Net worth
The net worth is the figure that is obtained by subtracting all liabilities from the assets. It can also be said as the value of what you finally own after deducting all that you owe.