Glossary of Financial Terms and Definitions
What is an Adjustable Rate Mortgage? An Adjustable Rate Mortgage (ARM) is a mortgage in which the interest rate is periodically adjusted according to various market rates. Lenders tend to favor ARMs because ARM rates rise and fall with market rates (the same market rates that determine what the lender is usually paying to fund [...]
What is an Annuity? A series of scheduled payments (e.g., each month). Each payment is usually the same amount as each of the other payments in the annuity. An annuity can take on a few different forms. For example, you might receive cash from an investment in the form of an annuity. Retirement plans often [...]
What is an Asset? Anything that you own that has value.
What is a Bond? Basically, an IOU issued by a company in order to raise money. When you buy a bond, you are essentially loaning money to a company with the understanding that you will receive what you invested along with a fixed amount of interest (also called the coupon) at some future date. The [...]
What is Compound Interest? The interest you receive on interest you have already earned. Example Suppose you invest $1,000 in a security that offers 10% interest compounded annualy. After one year you would have 10% more money in that account, or $1,100. Now, suppose you were to leave that $1,100 in that account for another [...]
What is Inflation? The overall increase of prices, and the overall decrease of the value of money. Accounting for infaltion is critical to your future financial security. Example Suppose you are planning your retirement and determine that you need $75,000 per year to live comfortably. If you forget to account for inflation, you could be [...]
What is Liquidity? The ability to quickly turn an asset into cash. For example, $10,000 in a savings account is very liquid. If you need to access the money quickly, you can simply go to the bank and withdraw the money. However, a $10,000 rare coins collection is illiquid. If you need $10,000 cash tomorrow, [...]
What is the Risk/Reward Principle? The concept that bigger financial rewards require bigger risks. If you are not willing to take a risk, it is less likely that you will generate large financial rewards. Thus, if someone offers you a risk-free/high-return investment opportunity, you should walk away because it is most likely a scam of [...]
What is the Rule of 72? A quick way to determine how long it will take you to double your money at a given interest rate. How to Calculate Divide the number 72 by the annual interest rate you expect to get on an investment. The answer represents the number of years it will take [...]
What is a Security? A financial asset, such as a stock or bond.
What is a Stock? A security that represents a part ownership in a company. When you buy a company’s stock you are buying a portion of that company and become a shareholder. Example Suppose you owned a business and wanted to expand the company’s production capacity and its product line. To do so, you would [...]
What is a Stock Market? An entity that enables you to buy and sell stock, which represents ownership in publicly traded companies. There are many stock markets in the world where stocks are traded. The primary stock markets in the U.S. are: NASDAQ OMX NASDAQ stands for National Association of Securities Dealers Automated Quotation system. [...]
What is a Tax Deductible Item? An item or expense that is subtracted from your gross income (e.g., total income), allowing you to reduce what you owe in taxes. Example An example of a tax deductible item is the interest you pay on your mortgage. If you earn $50,000 a year and you pay $5,000 [...]
What is the Time Value of Money? The idea behind the time value of money is simple: it is better to have $100 today than $100 in the future. Although this idea may seem obvious, it is important because it drives all financial decision-making. Having $100 now is more valuable than having $100 a year [...]