The news is often filled with financial and economic jargon that can be foreign to many readers. However, we ought to know the basics in order to keep up with current events and to ensure that we are understanding our own finances and investments. Here are some basic financial and economic terms that we think you should be familiar with.
There are many types of securities like bonds, stocks, options etc. These are debt instruments that act as promises to pay a particular amount, over some time-period or at a specified date in the future.
A bond is a long term security instrument (generally greater than 10 years). It is an investment, a loan, a promise. An investor lends funds to an entity for a defined period of time and can have a variable or fixed interest rate. The entity thus owes the lender, the principal investment + interest at a future date.
A stock is a type of security, that entitles the owner to receive a portion of a corporation’s earnings or assets. Owners of stocks are shareholders.
Collateral is something of value that a lender can take from a borrower if he or she fails to repay a loan according to the agreed terms.
A bill is a short term security instrument (generally less than 1 year). It is an investment, a loan, a promise. There are government and commercial bills, that are unsecured and can be interest bearing. A commercial bill of exchange is a promise to pay a fixed amount at a future date, without interest.
Discount means that an asset is sold at a price lower than its face value. This is in effect, an interest rate. The discount rate differs depending on the reliability/quality of the borower or debt instrument being sold, for example. If the lending entity believes that the asset being sold is not high risk or that the party requesting for funds is not high risk, then the discount will be smaller. If the lending entity thinks that there is higher levels of risk, it can lower the price it is willing to pay (which means raising the discount interest rate). Ex. Paying 90 dollars for something that is worth 100 dollars.
A dividend is a share of a corporation's earnings that is paid to shareholders. Dividends can come in different forms.
Every liability is someone else’s asset.
An asset is a item of economic value that an entity posesses. An item that can potentially be used for the entity's benefit in the future.
A liability is an entity's financial debt or obligation – something an organization owes.
A portion of an organizations funds that are kept unused in case of emergency, to cover their existing liabilities for example, for long term purposes and to protect against insolvency and bank runs for example.
The price/cost of money. The cost of borrowing/credit. This is the amount that is charged to a borrower or paid to a lender. It is a percentage of the principal payment.
A Central Bank is a government’s bank and a bank’s bank. It is responsible for managing the money supply and economy of a country or a group of countries as well as monitoring the financial institutions of said areas. Central Banks hold the reserves of a nation’s banks and set interest rates for commercial banks, not for private citizens. A Central Bank is not a commercial bank.
Austerity is a government’s attempt to address its growing debt issues. Measures usually used are the raising of taxes and the reduction of government spending. Austerity is a state of increased frugal behavior, typically taken by the government.
The ability to quickly turn assets into cash, ability to have cash on hand, ability to trade, have assets bought and sold.
Inflation is the rise in prices of goods and services. Purchasing power of currency decreases.
Disinflation is a reduction in the rate of inflation
Deflation is the reduction of prices of goods and services. Purchasing power of currency increases.