Here’s a comprehensive list of essential finance terminology, categorized for clarity:
1. General Finance Terms
- Asset: Anything owned by a person/company that has monetary value (e.g., cash, property, stocks).
- Liability: A financial obligation or debt (e.g., loans, mortgages).
- Equity: Ownership interest in a company (e.g., shareholders’ equity).
- Revenue: Income generated from sales or services.
- Expense: Costs incurred to generate revenue.
- Profit (Net Income): Revenue minus expenses.
- Cash Flow: Movement of money in/out of a business (positive vs. negative cash flow).
2. Investment Terms
- Stock (Equity): A share representing ownership in a company.
- Bond: A fixed-income instrument representing a loan to a company/government.
- Dividend: A portion of profits paid to shareholders.
- Portfolio: A collection of investments (stocks, bonds, etc.).
- ROI (Return on Investment): Profit earned relative to investment cost.
- Capital Gains: Profit from selling an asset at a higher price than purchase.
- ETF (Exchange-Traded Fund): A basket of securities traded like a stock.
- Mutual Fund: A pooled investment managed by professionals.
3. Corporate Finance
- Balance Sheet: Snapshot of a company’s assets, liabilities, and equity.
- Income Statement (P&L): Shows revenue, expenses, and profit over time.
- Cash Flow Statement: Tracks cash inflows/outflows from operations, investing, and financing.
- EBITDA: Earnings before interest, taxes, depreciation, and amortization (a measure of profitability).
- Leverage: Using debt to finance operations or investments.
- Valuation: Estimating a company’s worth (e.g., P/E ratio, DCF analysis).
4. Personal Finance
- Credit Score: A numerical rating of creditworthiness (300–850 range).
- APR (Annual Percentage Rate): Total cost of borrowing, including interest/fees.
- Compound Interest: Interest earned on both principal and accumulated interest.
- 401(k)/IRA: Retirement savings accounts (tax-advantaged).
- Net Worth: Total assets minus liabilities.
- Mortgage: A loan to purchase real estate.
5. Banking & Loans
- FDIC (U.S.)/CDIC (Canada): Government-backed deposit insurance.
- Collateral: An asset pledged to secure a loan.
- Amortization: Gradual repayment of a loan over time.
- Refinancing: Replacing an existing loan with a new one (often at better terms).
6. Market & Trading
- Bull Market: Rising asset prices (optimism).
- Bear Market: Falling asset prices (pessimism).
- Liquidity: How easily an asset can be converted to cash.
- Volatility: Degree of price fluctuations.
- Short Selling: Betting an asset’s price will fall.
7. Accounting Terms
- GAAP (Generally Accepted Accounting Principles): Standard accounting rules.
- Accrual Accounting: Recording revenue/expenses when earned/incurred (not when cash is exchanged).
- Depreciation: Spreading the cost of a tangible asset over its useful life.
8. Advanced Terms
- Derivative: A financial contract deriving value from an underlying asset (e.g., options, futures).
- Hedge: Reducing risk by offsetting investments.
- Alpha/Beta: Alpha measures performance relative to a benchmark; Beta measures volatility vs. the market.
Key Takeaways
- Assets build wealth, liabilities drain it.
- ROI and cash flow are critical for business/personal finance.
- Diversification (spreading investments) reduces risk.