woman explaining finance terms and basics of financewoman explaining finance terms and basics of finance

Your brain is about to explode with some finance knowledge. Here are 25 financial terms explained as simply and as quickly as possible. This article would help you quickly learn basic financial terms and banking terminology or revise the knowledge before you appear in any interview or discussion.

Basic Financial Terms Everyone Should Know

Here are the basic financial terms all students and working professionals should know.

1. Balance Sheets

Balance sheets are just financial statements that total up all debts and all assets. Balance sheets function with a simple equation: assets equals liabilities plus equity.

2. Liquidity

Liquidity is the principle of how quickly an asset can be converted into cash. Cash is the most liquid asset, usually followed by stocks. The least liquid assets are land and real estate because it can take weeks to months to years to sell.

Also Read: 10 Personal Finance Terms (Terminology) You Must Know

3. GAAP (Generally Accepted Accounting Principles)

GAAP are rules and conventions that govern how a company reports the state of their finances. It’s essentially just a standard, and companies can report their earnings as GAAP or non-GAAP.

Understand Balance Sheets in Finance Education
Understand Balance Sheets in Finance Education

4. Capital Gains

Capital gains are just the increase in value of an asset above what you paid for it. Capital gains can be realized and unrealized. Unrealized gains mean the asset hasn’t been sold, and realized means it has. You pay taxes on realized capital gains. Capital losses are the same, but when the asset is worth less than you paid.

5. Net Income

Net income is just total revenue minus expenses.

6. Equity

Equity is just the amount of money someone has in a stock or asset after subtracting off debts and money owed. It’s possible to have negative equity, like in a car or house, if you owe more than the asset is worth. Often a cause of negative equity is depreciation, which is a simple decrease in an asset’s value over time. Most physical assets depreciate over time, with real estate being the usual caveat to this rule.

learn about personal finance and savings
learn about personal finance and savings

7. EPS (Earnings Per Share)

EPS is the usual way in which a company’s profitability is represented. It’s simply net income minus dividends divided by the number of shares. Usually, share prices for a stock end up being some higher multiple of EPS.

8. Net Worth

Net worth is just the value of everything you own minus what you owe.

9. Amortization

Amortization is just the process of accounting for an asset that is intangible or non-physical in a way that spreads it out over time. This usually applies to assets like patents, copyrights, or trademarks.

10. Capital Markets

Capital markets are simply markets where buyers and sellers trade financial assets like stocks or bonds. Companies, institutions, mutual funds, and hedge funds are the usual participants in these markets.

11. Profit Margin

Profit margin is just net income divided by revenue. This gives companies an indicator of how much wiggle room they have to continue turning a profit.

12. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

EBITDA is a term commonly used to describe a company’s cash flow.

13. FICO Score

A FICO score is just a credit score from Fair Isaac Corp., the company that invented credit scoring. The score ranges from 300 to 850 and is based on payment history, length of credit, and total amount owed, though no one knows the exact formula in the public.

14. Stock Options

Stock options are the option or the right to buy a company’s stock at a given price. These are generally given to employees and can be hugely valuable if a company’s stock goes up after being granted an option at a lower price.

15. Bonds

Bonds are essentially just a loan from the purchaser of the bond to the seller of the bond. Government bonds are just notes for loans between the buyer and the government. Over time, the government pays it back, but before then you can also sell the bond to other investors.

16. Stocks

Stocks are just shares or portions of a private or public company that can be traded or sold. Stocks have value based on a company’s earnings, potential earnings, and other factors.

17. Cash and Cash Equivalents

Cash and cash equivalents refer to assets that are either cash or can be converted to cash easily, ergo they’re liquid.

18. Income Statement

An income statement is just a financial statement summarizing how much income and expenses a company incurred in a given time, often called a profit and loss statement.

19. ROI (Return on Investment)

ROI is a calculation that indicates how much money was made from an investment. It’s calculated as the income minus the cost divided by the cost times 100. In this sense, it’s expressed as a ratio.

20. Cash Flow

Cash flow is simply the net balance of cash that is going in and out of a company. It can be segmented into operating, investing, and financing cash flow based on where the money comes from.

21. Compound Interest

Compound interest is essentially just interest on interest. Over time, after earning interest on an investment, that interest payment starts earning its own interest, compounding over time, getting larger and larger.

22. Valuation

Valuation is just the worth of an asset or a company. Generally, it’s calculated with varying formulas incorporating income, EBITDA, revenue, cash flow, and other financial figures.

23. Liabilities

Liabilities are anti-assets or just debts owed. Liabilities can also present themselves as wages to employees or payments due to suppliers.

24. Working Capital

Working capital is the difference between assets and liabilities or the cash available on hand for daily operations.

25. Term Life Insurance

Term life insurance is an insurance policy that covers a set period of time where if you die in that term, your beneficiaries receive money, and if you don’t die, then the policy expires with no value.

Thanks to ConcerningReality Youtube Channel for providing the knowledge.

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