10 financial terms you need to know
1. Compound Interest
Compound interest is interest on the amount of money you have deposited or borrowed. When you are saving your money in a bank of some sort, compound interest is earned on the amount you deposited, then the interest you’ve earned over time will add up too.
2. FICO score
Fair Isaac Corporation, the company that created the calculation of credit scores. FICO score means credit score which loan givers use to see if you are applicable for a loan. Your score is based on several components like payment history, credit history, and how much you owe. Higher scores have easier times with banks but lower scores have difficulty getting loans.
3. Net Worth
Net worth is your asset minus your liabilities. Therefore you would collect all your assets like stocks, properties, cars, cash, etc. Then subtract all your liabilities like mortgage balance, credit card balances, and any other loans or obligations. The number you get will show how you are doing financially. Having a negative number is bad so you need to cut down your liabilities.
4. Asset Allocation
Asset allocation is where you put your money. The three major asset classes are stocks, bonds, and cash. These react differently correlating with the market and economy.
5. Capital gains
Capital gains are the difference between how much something is worth now versus how much it was originally purchased. The gain happens when something is sold. Let's say you bought a house for 50k and 5 years later it is worth 100k. The gain won’t happen until you sell the house. There is a capital loss when the price goes down. For example, if you bought a stock for 10 bucks and a month later it goes down to 5. You just had a capital loss of 5 bucks.
Rebalancing is the process of bringing your stocks and bonds back to your desired percentages. For example, let's say your asset allocation is 50% stocks and 50% bonds. The stock market is booming so you change it to your desired percentages.
7. Stock options
Stock options can be presented by businesses as management encouragements. For example, if a director helps raise the worth of the company’s stock above the price of their option, the manager can buy the stock at a lower price and pocket the capital gain if they sell.
The value that would be returned to a company’s shareholders if all of the assets were liquidated(selling all assets into cash).
9. Income statement
An income statement organizes your sources of income and expenses.
10. Balance sheet
A balance sheet organizes your assets and liabilities.