Enhance Your Finance
Finance can be a tricky concept. From acquisition indigestion to zombie titles, there are some words and phrases that may sound out of place in a financial setting. Others you might often hear repeatedly when speaking with financial pros about money and investments, yet you may not know exactly what they mean.
According to Stephen P. Ferris, senior associate dean of graduate studies and research at the University of Missouri’s Trulaske College of Business, there are 15 terms you should know. This handy guide will ensure you don’t fall into confusion the next time you’re in the midst of a financial exchange.
Terms You Know
You’re likely familiar with these terms because of their common everyday usage, but just in case, here’s a refresher.
Stock: A type of financial investment that indicates partial ownership of a corporation’s earnings and assets. A shareholder’s ownership of the company is determined by how many shares he or she owns.
Bonds: Another form of investment, bonds occur when someone loans money to a governmental or corporate entity for a defined period of time with a fixed interest rate.
Asset: Something of economic value owned by a person or company. Assets are used to increase the value of and to benefit a person or company in the future. They are items of economic value that can be exchanged for money.
Inflation: The rising rate of the prices of goods and services and the consequent falling rate of purchasing power as dependent upon economic changes.
Insurance: When an individual or company buys financial protection or reimbursement against losses.
Terms You Might Know
You’ve probably heard the names of these terms but may not know their full meaning.
Stock index: A measure of changes in the stock market computed from the average prices of representative stocks. One of the best-known indexes is the Standard & Poor’s 500.
Diversification: Choosing a wide variety of investments, such as stocks and bonds, in order to decrease potential risks.
Mutual fund: An investment vehicle that sells shares to the public and then uses the money to buy investments. Mutual funds give small investors the opportunity to participate in diversified portfolios.
Treasury bill: A short-term individual loan to the U.S. government that is sold in increments of $1,000. Instead of fixed interest rates, treasury bills provide appreciation increases to the holder.
Liability: An obligation an individual or company is legally responsible for, such as a loan or mortgage. The obligation is resolved between the lender and the borrower through the transfer of goods, services or money.
Terms You Should Know
These are terms you likely aren’t familiar with, but knowing them could make you better off monetarily.
Leverage: Boosting an investment’s potential return through options, borrowed funds and other financial techniques. Leverage increases both gains and losses, so it comes with a greater risk.
Portfolio risk: The risk that a combination of assets within an investment portfolio could be unsuccessful in meeting financial goals. Risk can be reduced by successful diversification.
Investment horizon: The amount of time a specified amount of money is expected to be invested. It is influenced by how much money will be needed and when; the shorter the investment horizon, the less risk the investor is prepared to accept.
Risk-adjusted return: A comparison of the amount of money an investment returns to the risk involved to produce that return.
Hedging: Making an investment in order to lessen the risk of an asset’s unfavorable price movements. This includes taking a counteracting position in a similar investment.