Finance terminology can be a dense and overwhelming subject.
To simplify the process, we’ve compiled a comprehensive glossary of finance terms that are essential for adults to know.
Financial Terms & Definitions
Adjustable-Rate Mortgages
An adjustable-rate mortgage (ARM) is a mortgage with a variable interest rate. Initially, the interest rate is usually below the market rate.
The rate could change over the course of time as the market fluctuates.
Annual Percentage Rate
The cost of credit over the course of a year determined as a percentage.
Asset Allocation
An investment strategy aimed to balance risk and reward by allocating the assets within an individual’s portfolio according to goals, risk tolerance, and investment horizon.
Bonds, United States Savings
Savings bonds issued by the United States government range in denominations from $50 to $10,000. The bond is typically a long-term, low-risk investment tool.
The bond accrues interest over time and can be redeemed by the owner.
Break-Even Analysis
Break-even analysis estimates the sales volume a business needs to achieve to cover the fixed and variable costs of production.
Capital Gains & Capital Losses
Capital gains are the difference between the current worth of an investment and its original purchasing price. To reap the gains of an investment, it must be sold. Capital gains are taxable.
When an asset or investment depreciates in value, it is a capital loss. Capital losses, while not ideal, can possibly reduce an investor’s taxes.
Cash & Cash Equivalent
Cash and cash equivalents (CCEs) are investments that can be converted into cash. CCEs includes bank accounts, short-term government bonds, and marketable securities with maturities of less than 90 days.
Cash Flow
A cash flow is the movement of real or virtual money in and out of a business. Received cash represents inflow, whereas money spent represents outflow.
Certificate of Deposit
A savings account that holds a fixed amount of money for a predetermined period of time, typically ranging from six months to five years. In exchange, interest is paid from the issuing bank once the certificate is redeemed.
Consolidation
Consolidation is the act of combining multiple loans into a single loan with its own payment plan and a lower interest rate.
It may be to the advantage of the borrower to consolidate the loans, thus leaving a single payment rather than multiple debt payments on multiple plans.
Consolidation simplifies repayment for the borrower.
Deferment
To claim deferment is to temporarily pause scheduled payments on outstanding loans. For subsidized loans, interest will stop accruing on the loan balance until repayment has resumed.
However, for unsubsidized loans, interest will continue to accrue during the time of deferment.
Dividend
A dividend is money paid to a stockholder by an investment fund or company. The money is garnered through profits of said investment fund or company and the amount is typically per-share.
Equity Method
Equity method is an accounting method used to record investments in associated companies or institutions.
The investor company then reports any revenue earned by the first company on its income statement in an amount that is proportionate to the percentage of equity invested.
Expense Ratio
An expense ratio is the annual fee an investor expects to pay in order to maintain a mutual fund.
Expense ratios also cover other maintenance fees for the mutual fund, including administrative and record-keeping expenses.
Grace Period
A grace period is a predetermined length of time automatically granted on a loan during which the borrower will not be required by the issuer to make a payment.
Loans with grace periods can include, but are not limited to, student loans, personal loans, and auto loans.
Home Equity
Home equity is the value of a homeowner’s interest determined by the mortgage owed and the current worth of the home.
Home equity can fluctuate depending on how much mortgage is paid and the home’s value.
Indexes & Index Funds
An index fund is a mutual fund that was created to match the stocks of a market index, like the S&P 500.
The index portfolio of stocks is the same as the index that is being tracked — when the prices of stocks within the index fluctuates, the index fund will also fluctuate.
Interest
Interest is the monetary charge associated with borrowing money or taking out a loan, typically shown as an annual percentage rate (APR).
The interest collected is then paid to the lender or financial institution who had provided the loan.
Line of Credit
Line of credit (LOC) is a predetermined borrowing limit entitled to the borrower at any time. The borrower can take out as much money as they need so long as the amount does not exceed the borrowing limit.
Limited Liability Entities
Limited Liability Entities (LLE) status offers business owners the liability protection of a corporation along with the tax advantages of partnerships.
Taxable income and losses are recorded on the tax returns of the owners, as opposed to a corporation, which is chartered by the state and treated mostly as a separate legal entity.
Minimum Payment
The minimum payment is the lowest possible amount borrowers must pay on their billing statement. To avoid late fees, punctuality on the minimum payment is crucial.
Mortgage
Used in real estate transactions where the property is collateral, a mortgage gives the lender the right to take possession of the property if the borrower fails to pay the loan.
Mutual Fund
A mutual fund, generated by many investors, is a collection of assets. A mutual fund diversifies an investor’s asset allocation, thus spreading the risk.
Mutual funds are usually maintained by money managers.
Net Worth
Net worth is the combined value of financial and non-financial assets owned by an individual or institution. The value of any outstanding liability is removed from the list of assets to determine net worth.
Operating Lease
An operating lease delineates the contractual usage of an asset. However, under an operating lease, the lessee does not have ownership rights over the asset.
Consequently, the leaser is responsible for the risk and return of the asset.
Price-to-Earnings Ratio
One determinant of a stock’s value is represented in its price-to-earnings (P/E) ratio. P/E ratio expresses the relationship between a stock’s price and its earnings.
Low P/E, between one to 10, indicates the stock is undervalued or the company is struggling.
Overly high P/E ratios, which can be upwards of 25, could indicate the company’s bubble is soon to burst.
A stable P/E ratio is anywhere between 10 and 17.
Principal
The principal amount of a loan is the sum borrowed. This does not include any applied interest.
Prospectus
A prospectus is a legal document containing information about an investment, whether that be a mutual fund, a stock, or a bond.
A prospectus is required by and filed with the Securities and Exchange Commission (SEC).
Roth IRA
A Roth IRA is a retirement account where the account holder pays taxes on money going into the account, but the future withdrawals are tax-free.
Opening a Roth IRA account is ideal if the account holder anticipates having higher taxes during retirement than they do while working.
Small Business Corporation
A small business corporation (S corporation) is a status a company with 35 or fewer shareholders adopts so the benefits of an incorporated company can be utilized while still being taxed as though it were a partnership.
Small Business Economic Injury Disaster Loan
Small businesses, small agricultural cooperatives, and some private nonprofit organizations in disaster areas that faced a substantial economic injury could be eligible for an Economic Injury Disaster Loan (EIDL).
Stocks
Stocks, or shares, represent ownership equity of a part of a corporation or company and thus allows the owner of a stock a portion of that company’s profits.
Student Aid Report
The Student Aid Report (SAR) is a form received after completion of the online application for Federal Student Aid (FASFA). The form delineates the federal student aid made eligible to the applicant.
Subsidized Loans
A need-based loan, subsidized loans are awarded in accordance with the information an undergraduate student provides in their FASFA application. Subsidized loans do not accrue interest until repayment starts.
Target-Date Fund
Target-date funds are mutual funds tailored to a certain time or target date. Often found in 401(k) plans and college savings accounts, target-date funds are designed to allow for optimal growth of a fund over a specified time frame.
In the early stages of a target-date fund, most assets take the form of riskier classes like stocks. Over time, the assets will shift to low-risk classes like bonds.
Term Life Insurance
Term life insurance provides coverage at a predetermined, fixed payment rate for an outlined period of time.
Unsubsidized Loans
An unsubsidized loan is for undergraduate and graduate students, not based on financial need. Eligibility is determined by the cost of attendance, minus any other financial aid — like scholarships or grant money.
Interest accrues immediately upon disbursement of the unsubsidized loan and continues to accrue until the loan is paid off.
401(k) Plan
A 401(k) plan is a contribution retirement account offered by employers to members of the staff. Contributing to the account happens automatically once payroll withholdings are selected.
In some cases, employers can choose to match the employee’s contributions.
Investments in a 401(k) are not taxed until the money is withdrawn from the account.
529 Plan
A 529 plan is a tax-advantaged savings account that helps pay for higher education expenses of a designated beneficiary.
Expert Financial Consultation with HRCCU
As a local credit union, HRCCU prioritizes the financial wellbeing of its members.
To learn more about how the financial advisors at HRCCU can help grow your financial portfolio, visit our branch locations or contact us to learn more about the extensive financial services offered.
