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Financial Terms Everyone Needs to Know

One of the important things people who are interested in exploring the financier industry is learning about the common terms. The reasons, why people need to learn the financial terms, is that they are useful in assisting people make decisions. For instance, they can help you make financial decisions ranging from stock investing, home buying and preparing your income taxes. One of the ways own which you can understand the financial terms in details is by taking time to know their meanings. Here are the common financial terms you need to know about.

Compound interest is a common financial term you need to know about. It refers to the interests on the amount of money you have deposited or borrowed. For people who are investing or saving, compound interest is earned on the amount they have deposited including any interest that has accumulated over time. The way compound interest is calculated when borrowing is different, here it refers to the interest charged on the original amount one was loaned and the interest charges added to the outstanding balance over time.

In addition to compound interest, it is a good idea to also know about net worth. When you want to calculate your net worth, you will have to find the difference between your assets and liabilities. If you are looking forward to calculating your net worth, you will have to add up all of the money or investment you have, without forgetting the current market value of your car or home and the balances in your checking, retirement, and savings. Having the sum of your investment is not enough, besides, you need to subtract all your debt from the investment which includes your mortgage balance, loans, obligations and credit balances.

Besides, it is a good idea to know about capital gains. When you want to determine the capital gain, you will have to take the current value of an asset and compare it with the price it was originally purchased for. When determining the capital gain, you need to keep in mind that the gain is only on paper until the asset or investment is sold. The other side of capital gain is capital loss which refers to the decrease in the asset’s value ever since it was bought.

Another financial term you need to know about is asset allocation. Asset allocation is where you choose to put your money. Assets can be categorized into stocks, bonds and cash. When you want to select the assets to invest in, you need to remember that every asset reacts differently to the conditions in the market and economy, for this reason, you need to select those that are in line with your personal goals. Therefore, when you understand these terms, you will have an easier time understanding finance.

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