financial terms

Top 10 Financial Terms You Need To Know

The Financial Basics

Learning financial terms is almost like learning a new language. It’s always good to learn the basics first, so starting out with memorizing a few vocab words will help you learn more about finance.

Here, we will discuss the 10 most important financial terms for any aspiring investor looking to polish his/her vocabulary. After reviewing some of these terms, you will better understand most financial news, charts, and books. This will provide you with a clearer understanding of the complicated rhetoric used in financial media.

1. Stock

You might have heard the term stock before, either on the news or from the long lectures your parents use to give you about your future retirement. 

The definition of a stock is “the capital raised by a business or corporation through the issue and subscription of shares.

Essentially, you invest in a piece of the company’s capital, or simply the money it has raised throughout its lifespan. Depending on the size of the company, the number of shares available for purchase will fluctuate. Exchanges are where you can purchase and sell stocks freely.

The most notable exchanges are in New York, Shanghai, Frankfurt, Chicago, and Tokyo.

2. Bond

A government bond is a bond issued by the federal government that promises interest payments to replace its face value. When compared to stocks, bonds are relatively cheap, but have much less volatility; decreasing the investor’s profit potential.

The biggest attraction that a government bond has for the investor is its security. The best part about bonds is that they’re less likely to decrease in value.

The U.S. government supports the bonds and keep that from happening. Bonds won’t initially pay very well at first, but over a lifetime they can turn into a solid investment and offer protection against stock market volatility.

3. Commodity

Commodities are items that can be bought or sold and are typically agricultural products and raw materials. A popular commodity traded on the NYSE and foreign markets is gold.

The pricing of gold, and that of any other commodity, constantly fluctuates from supply and demand. The price of the commodity will decrease with an increase in supply, decreasing the demand, and increase with a decrease in supply, increasing the demand. Two other popular commodities traded on global markets are coffee and oil.

Coffee is an agricultural product that ranks as the second most traded commodity in the world. Similarly, oil outranks coffee at number one and has a much greater influence over global economics.

The production of US Shale in 2015 has had huge ramifications on the pricing of oil. Shale production economically damaged countries that classify as oil economies, meaning their economy is dependent on the production or sale of petroleum.

The economy of Venezuela, for example, had a 90% reliance on petroleum as a major export for its economy, and in 2015 the nation fell into hyperinflation causing it to default on much of its debt.

4. Option

An option is a contract that gives the investor, the right but not the obligation, to buy 100 shares of a particular stock within a given period of time.

The option contract provides a different strategic approach to investing in the stock market. Options contracts give investors the opportunity to purchase 100 shares of stock at a significantly cheaper price than buying individual shares. When you buy an option, you essentially buy the contract and no actual shares of stock.

Calls and puts are are your two options when trading options. Call options are placed with the anticipation of an increase in the stock’s value over time. Puts are bought with the intention of shorting a stock and profiting from the decrease in value.

Options are more complicated to trade than stocks and require a high understanding of trading strategies and spreadsheets.

5. Financial Cash Flow

Cash flow is literally the flow of cash within a business, and out of a business. The cash flow of a business is one of the most important factors in considering how well it’s performing.

Businesses typically require higher cash flow to pay off debts, expenses and eventually make a profit. For an investor, good cash flow is an important indication of the company’s financial performance. An investor should think of a company’s cash flow as blood circulation within the human body.

Without the constant flow of blood, your organs will not get the proper dosage they need to keep working, and as a result, your body will shut down. Similarly, in the case of a business, the cash flow is the blood flow, and the organs are the payments that need to be made such as stock, raw materials, employees, and rent.

Without the flow of cash, the business will not be able to keep its essential operations running, and therefore, it will shut down.

6. Financial Balance Sheet

The balance sheet is basically a recording of the company’s current financial position. Calculating the balance sheet requires adding up all the liabilities and equity of a company, then comparing it to that of its assets.

The equalization of a company’s liabilities and equity in its assets is imperative since a business relies on these components to expand and pay off loans. The balance sheet can serve the investor as another clue as to how the company is performing financially. Over a long stretch of time, the balance sheet will eventually change.

7. Liability

A company’s liabilities are its financial obligations that arise during its business operations. Debts, for example, are a liability for a business. Definitively, a liability is any kind of loan taken out by a business that needs to be paid back in full. Other examples of liabilities can be anything related to an owing of money by the business.

Taxes, general rent or operational payments are generally considered liabilities within a business. Any electrical, water, heating, or gas payments are all considered liabilities towards the business. Liabilities differentiate from general expenses due to the necessity of payment.

Moreover, taxes and electrical payments are made because they’re required, without the profitability of the business in mind. This means that the business is still obligated to make those payments even if it diminishes its own revenue. This is what differentiates liabilities from general expenses.

8. Interest Rates

The amount charged by a lender to a borrower for a loan of money is called an interest rate. Banks are a popular outlet for most business funding, making them the most prominent loaners in the world.

The interest rate charged by the bank is the cost of the loan to the borrower, to the lender, the interest rate is the rate of return. The Federal Reserve is the central banking system of the United States and is responsible for much of the country’s financial system. The Federal Reserve will raise or lower interest rates depending on the state of the economy.

By raising interest rates the Federal Reserve can make it more difficult for banks to loan money; typically its purpose is to cool an overheated economy.

9. Yield

The amount of cash that is returned to the owner of the security from interest or dividends is known as yield. Essentially yield is just the profit you make from stock, either from its general interest over time or its dividends.

10. Financial Dividend

Dividends are defined as the payments made quarterly to the investor from the company’s share of profit. High-value Blue Chip Stocks usually pay hefty dividends since they have the capital to do so.

An increase in a company’s dividend rate is a very good sign and typically showcases the company’s growth. Many think that dividends are just extra income, some investors even prefer to spend their dividends without reinvesting them.

The truth is that dividends are what can push your capital up to new highs. The more money you put into a stock that offers dividends, the more money you will make.

Any investor with a decent amount of capital can make tremendous returns off of their dividends alone. It is even possible to make a six-figure annual income from dividends; a salary in which people have spent years in school and professional training to obtain.

And there you have it, 10 financial terms that you need to know now. It won’t hurt to learn more vocabulary of course but knowing these terms are a good starting point.

Hey there! I'm Alex, a freelance writer, and blogger. I started my journey towards FI in 2018, when I created this blog. I love talking about blogging, writing, personal finance, and internet entrepreneurship. If you enjoy my content, stick around, and we'll share ideas for reaching FI together!

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