The financial world is chock-full of esoteric language and terms. Knowing the lingo can be the difference between personal security and debt-ridden disaster. How much do you know about these basic financial terms?
What are "stocks"?
If you decide to buy stocks, you're essentially purchasing a small part (or share) of that company. Your investment can increase or decrease in value depending on that company's successes or failures.
Which entity charges "interest"?
Lenders (usually) charge interest. Interest is the additional amount of money that's added to the total amount of a loan. Interest rates vary widely depending on the lender and the type of loan.
What's a defining trait of "diversification"?
You've heard the advice, "Don't put all of your eggs in one basket." That's especially true in investing. By diversifying your investments, you're minimizing risk, so if one company struggles or fails, you won't necessarily lose all of your hard-earned money.
Which term means that you owe money?
If you owe money to anyone or any company, you're in debt. For most people, debt is a bad thing, as it reduces their ability to save for long-term financial goals.
Credit card companies fall into which of the following categories?
Credit cards companies, like banks, are lenders (also called creditors). Consumers and companies borrow money from lenders for many reasons, such as car loans or in bad times, simply to pay for groceries.
A lot of credit card companies advertise "APR". What's that?
The APR is the annual percentage rate, the interest that you pay on any particular loan, particularly if you don't pay the bill on time. It can also refer to the percentage that you make on an investment.
Net income is what you have after you compare your earnings with your _______.
Net income is a good way to understand how much money you're truly making. It's what you have left after you compare your earnings with your expenses.
What is a 401(k)?
A 401(k) is a type of retirement savings account. Typically, when you put money into the account, your employer will contribute, too. Sometimes, they'll even match your contribution, which doubles your money.
A mortgage is a type of ______.
A mortgage is a house loan. In America, 30-year mortgages are often one of the best investments for average consumers, as average homes tend to gain value over time.
You'll get an "amortization schedule" after you do what?
If you get a loan, the lender should provide you with an amortization schedule, which displays how much money you owe each month, and how those payments affect the overall amount that you owe.
If you add up all of your assets and subtract your debts, what do you have?
Your net worth is the sum of all of your assets, minus your debts. Some unlucky people work all of their lives and wind up with a negative net worth.
What are "dividends"?
Dividends are the part of a company's profits paid to shareholders. Dividends are most often doled out on a quarterly basis.
What's a name for a collection of stocks, bonds or other assets managed by an investment company?
In a mutual fund, you pool your money with other investors, and then the investment company invests those funds in small shares of many different corporations. The idea is to minimize risk ... and maximize return.
A Roth IRA is ______.
A Roth IRA (Individual Retirement Arrangement) is an individual retirement account, one that's typically not taxed. The contributions that you make to a Roth IRA, however, are not tax-deductible.
With regards to a loan, what is "principal"?
The principal is the initial loan amount. When you're making monthly payments, your payment first goes towards interest -- the rest goes to the principal. If you're making only minimum monthly payments, you're likely not making much of a dent in the principal.
What purpose does a credit report serve?
A credit report provides details of your debt history, from credit cards to mortgages to car loans. It also develops your credit score.
How does your credit score affect your financial life?
If you pay your bills on time, your credit score will be much higher than if you never even make minimum payments. Banks don't generally like to make loans to people with low credit scores.
If the stock market is doing well, it's often called what?
A bull market is great -- it means that stocks are generally rising in value, which is good for your investments. A bear market, though, is the bane of most investors and it means that the stock market is falling.
Your house is technically which of the following?
A home mortgage is a type of liability, which is another word for debt. If you don’t take financial responsibility for your liabilities, very bad things happen.
If you put money into a certificate of deposit, you will receive ______.
A certificate of deposit is a little like a savings account, but it pays more interest. Typically, you can't withdraw money from a CD until the maturity date, which is months or years after you start the account.
What does it mean if you file for bankruptcy?
If you owe more money than you can ever hope to pay, you may have to file for bankruptcy. It's a tool of last resort, as it leaves a red stain on your credit report for many years.
At a retail bank, what's another (more common) name for a "transactional account"?
A checking account is a type of transactional account. It means that, unlike a savings account, you can use the account to pay for things. For example, you can write a check to pay your credit card bill.
With regards to the financial world, what does "MMA" stand far?
An MMA is a money market account, which, like a checking account, is another type of transactional account. These accounts pay interest (like savings accounts) but the rates depend on the interest rate of the money markets.
What's another name for collateral?
Borrowers who secure loans sometimes offer up collateral (or security), assets that are used to prove that they're going to pay back the loan. The bad part? If they don't pay back the loan, the creditor can seize the collateral.
What does "debt consolidation" accomplish?
If you have high-interest debt from multiple sources, you may be able to perform debt consolidation, which lets you combine debt to make just a single payment each month -- and that payment typically has a lower interest rate. That means you'll pay less total money in the long run.
An "ARM" is a type of what?
It's not the flesh dangling from your shoulder. An ARM is an adjustable rate mortgage, in which the interest rate changes after a set number of years. ARM interest rates fluctuate with market values and they frequently rise, meaning that you might wind up owing far more money than you would with a fixed-interest rate mortgage.
What's the bad thing about "payday loans"?
Payday loans (sometimes called cash advances) are often acts of desperation. They have very high interest rates that can accelerate a spiral into debt.
True or false, stocks and bonds are the same thing?
"Stocks and bonds" is a common phrase, but these two are not the same. Stocks pay dividends (or profits) to shareholders; bonds are just long-term loans to a company, and the company simply repays the principal on a predetermined date.
Compound interest is basically interest on _______.
Compound interest is basically interest on interest. With regards to investing, it means that you're reinvesting interest instead of having it paid out, and it can quickly snowball a small investment into a much larger sum. The reverse can happen if the compound interest is in relationship to a debt.
What's the term that means you sold something (i.e. stocks, property, etc.) for more money than you spent to get it?
Capital gains are when you sell anything for more than you spent to obtain it. You'll likely pay taxes on capital gains -- but you probably won't have to pay taxes on capital losses.
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