Do you feel overwhelmed by financial terms? Do you want to educate yourself and understand your finances better? Great! Here are eight wealth-related terms you should know to help boost your financial and investment knowledge.
Term 1: Inflation
Inflation is a price increase that translates into a decrease in consumers’ purchasing power. That’s because as prices increase, one unit of money purchases fewer goods than it did in the past.
The consumer price index is a standard measure of inflation and consumer purchasing power decline. It helps identify the price change for a basket of goods.
A basket of goods shows a consumer pattern of spending money. The prices of thousands of goods are evaluated before the inflation rate is identified.
Term 2: Euribor
Euribor stands for Euro Interbank Offered Rate. This rate is based on the average rate at which banks in the Eurozone offer short-term lending of their excess reserves to each other. Euribor is published at 11:00 (Central European Time) every day.
Euribor reference rates are significant because they impact the interest rates of all financial products—from mortgages to saving accounts.
Term 3: Net worth
Net worth is the difference between what you own (your assets) and the amount you owe (liabilities). Your assets can be any kind of wealth, such as property, shares, bonds, or cash. Your liabilities are debt, such as a mortgage or loans.
Simply subtract your liabilities from your assets to calculate your net worth. Knowing your net worth helps you understand where you stand with your finances.
Term 4: Stocks
Stocks are often called equities and denote ownership certificates of a company. Organizations issue stocks to finance the development of their products. Stock units are called shares. By buying shares, investors become shareholders.
There are two types of stocks — common and preferred. Common stocks give shareholders the right to vote and receive dividends. Preferred stock shareholders cannot vote but have higher claims on assets compared to common stocks.
Term 5: Shares
A share is a unit of measurement for a company’s ownership. Corporations make it available for sale to raise money for their operations. When buying shares, you become a company’s shareholder.
There are two types of shares — equity and preference shares. With preference shares, you can yield dividends but have no voting rights. When owning equity shares, you receive a part of company earnings and can vote at annual general company meetings.
Term 6: Bonds
Bonds represent an investor (creditor or debtholder)’s loans to a borrower (issuer). Bonds can be corporate or governmental.
This instrument is fixed-income as a creditor receives a fixed interest rate at the bond’s maturity date (when the bond’s total amount and accumulated interest rates are paid out).
When bonds are issued, they should include information, such as bond terms and interest rates, and specify the bond’s maturity date.
Term 7: ETFs
ETF is an exchange-traded fund that you can buy on a stock market the way you do with regular stocks. ETFs are a basket of securities containing different investments — bonds, stocks, or commodities.
Demand and supply primarily affect the price at which you buy an ETF. The more demand for an ETF, the more expensive it becomes.
Term 8: FICO score
The acronym FICO stands for Fair Isaac Corp. — an organization that has introduced this methodology to everyday use.
FICO denotes an individual’s capability to pay back a loan and encompasses various criteria such as payment history, its lengths, or the total amount of mortgage or loan owed.
FICO can vary from 300 (the worst) to 850 (the best) points. The higher your score is, the more trustworthy you become for a bank.