Financial Glossary
Understand the jargon. 36 financial terms explained in plain English — 15 of them with full formulas and worked examples.
The process of spreading out a loan into a series of fixed payments over time. You pay off the loan's interest and principal in different amounts each month, although your total payment remains equal each period.
Read the full explanationAn investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon.
Read the full explanationA prolonged period in which investment prices fall, accompanied by widespread pessimism.
Read the full explanationA financial market in which prices are rising or are expected to rise.
Read the full explanationThe mean annual growth rate of an investment over a specified period of time longer than one year. It represents one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.
Read the full explanationAn increase in a capital asset's value, realizing a profit when the asset is sold.
Read the full explanationA tax on the profit realized on the sale of a non-inventory asset. The most common capital gains are realized from the sale of stocks, bonds, precious metals, real estate, and property.
Interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan. It is essentially 'interest on interest'.
A personal finance measure that compares an individual's monthly debt payment to their monthly gross income. Your DTI is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.
A risk management strategy that mixes a wide variety of investments within a portfolio. The rationale is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security.
Read the full explanationA distribution of a portion of a company's earnings, decided by the board of directors, paid to a class of its shareholders. Dividends are often distributed as cash, though they can sometimes take the form of stock.
A financial ratio that shows how much a company pays out in dividends each year relative to its stock price.
Read the full explanationEarnings Before Interest, Taxes, Depreciation, and Amortization.
Read the full explanationA fixed payment amount made by a borrower to a lender at a specified date each calendar month. Equated monthly installments are used to pay off both interest and principal each month so that over a specified number of years, the loan is paid off in full.
The annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including management fees, administrative fees, and operating costs.
Government-issued currency that is not backed by a physical commodity.
Read the full explanationA person or organization that acts on behalf of another person or persons, putting their clients' interest ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary requires being bound both legally and ethically to act in the other's best interests.
A financial instrument provided by banks which provides investors a higher rate of interest than a regular savings account, until the given maturity date. It is a highly secure investment.
An individual's total pay from their employer before taxes or other deductions. This includes income from all sources and is not limited to income received in cash; it also includes property or services received.
A type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the S&P 500 or Nifty 50. It provides broad market exposure, low operating expenses, and low portfolio turnover.
The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.
Read the full explanationAn asset that can readily be converted into cash in a short amount of time with little to no loss in value.
Read the full explanationThe degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price. Cash is considered the most liquid asset, while real estate or fine art are relatively illiquid.
A single payment of money, as opposed to a series of payments made over time (such as an annuity). In investing, it refers to putting all your money into an investment at once, rather than dollar-cost averaging.
A type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers.
Read the full explanationThe value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. It is a snapshot of an entity's current financial position.
Read the full explanationThe original sum of money borrowed in a loan or put into an investment. Similar to the way 'principal' refers to the original sum of money, it can also refer to the face value of a bond.
A performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment's cost.
A simplified way to determine how long an investment will take to double given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors obtain a rough estimate of how many years it will take for the initial investment to duplicate itself.
A portion of income not subject to tax that can be used to reduce your tax bill. It is a flat-dollar, no-questions-asked reduction in your adjusted gross income.
An investment strategy offered by mutual funds to investors, allowing them to invest equal amounts of money at regular intervals (usually monthly). It promotes financial discipline and helps in averaging the cost of investment.
A range of incomes taxed at a given rate. In a progressive tax system, your tax rate increases as your income moves into a higher bracket.
A reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Deductions are subtracted from a taxpayer's gross income.
Life insurance that provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments or conditions.
Extended Internal Rate of Return; a metric to calculate return on investments with multiple cash flows.
Read the full explanationThe income returned on an investment, such as the interest received from holding a security. The yield is usually expressed as an annual percentage rate based on the investment's cost, current market value, or face value.