Financial Terms Glossary
Written by Eddy Hood
While managing your finances, you may come across terms you don't understand. Sometimes financial experts engaging in accounting or bookkeeping work use unfamiliar terms to explain and describe transactions such as loans or investments. If you don't understand the terminology, you might not have a full grasp of the process. Increase your knowledge of terminology in the financial world with a glossary filled with the most common terms.
Amortization - A debt may be amortized with a specific schedule for paying back the principal and interest in equal payments by the end of the loan term.
Annual Percentage Rate - The APR is expressed as a percentage, indicating the the interest and fees charged for a loan over a one-year period.
Annuity - An investment may pay annuities to an investor, which are equal payments occurring at regular intervals. Annuities include compounded interest, also.
Appreciate - An asset or investment may appreciate in value, which means that its worth increases.
Asset - An asset is something you own, such as property, structures, money, or investments like stocks or bonds.
Audit - An audit is an in-depth examination of an individual's or company's finances, performed by an auditor.
Balance - A balance may be the amount of money present in a checking or savings account. Balance can also indicate the amount of money remaining to be repaid on a loan.
Bankruptcy - When an individual or a company has insurmountable debt and cannot repay it, it's possible to declare bankruptcy to receive legal protection from the debts. Bankruptcy involves a legal process, possibly including the sale of assets to reduce the debt amount.
Bond - The government or a corporation may issue bonds to investors indicating a specific debt between the business entity and the investor. The government or corporation agrees to pay the investor the face value of the bond and interest for the term of the bond.
Budget - A budget is a written or electronic accounting plan to help you manage your finances and save money.
Certificate of Deposit - A certificate of deposit (or CD) is an investment that involves the deposit of a specific amount of money into an account. You must keep your money in the account for a specified term to earn interest. Early withdrawal will result in a penalty.
Charge - Making a charge involves a purchase on a revolving credit account. The consumer borrows the money, which will result in interest charges unless the borrower pays the amount in full before the grace period ends.
Collateral - Some loans require property to assure repayment of the loan. This property is called collateral.
Commodities - Commodities are investment in tangible goods, such as gold or wheat. Investors hope prices of commodities will increase, resulting in a profit.
Cosigner - Some lenders require an additional party, or cosigner, to be added to the contract to guarantee payment if the borrower defaults.
Credit - Credit encompasses money borrowed that a borrower will need to repay.
Credit History - As consumers manage finances, borrowing and repaying money, they develop a credit history that details these transactions. Future loans depend on a solid credit history, because lenders check this information.
Debt - A debt is money or goods owed to another individual or to another entity.
Default - A default occurs if a payment is not made according to the terms of an agreement.
Deposit - Placing money into an account is a deposit.
Depreciation - An asset's value may go down over a period of time due to wear and tear, known as depreciation.
Diversify - An investor will typically spread out investment capital among various types of investments, known as diversification. This practice helps reduce investment risks.
Dividend - A company pays its stockholders in dividends to share company profits.
Earned Income - People who work for their wages receive earned income.
Expenses - Spending money on needs and wants is sometimes referred to as paying expenses.
Finance Charge - Lenders charge borrowers finance charges as fees for lending money. Borrowers who pay off a balance within a grace period can avoid finance charges.
Fixed Expenses - Some payments do not change from month to month, making them fixed expenses. An example of a fixed expense might be a car payment.
Foreclosure - If a borrower does not make payments on a secured debt, the lender may initiate legal foreclosure proceedings to seize the property associated with the debt. Default on a mortgage could result in foreclosure and auction of the property.
Grace Period - Revolving credit card lending involves grace periods, wherein borrowers do not have to pay finance charges or interest if they pay balances in full.
Insufficient Funds - If an account holder makes a bookkeeping error and writes a check without having at least this much money in a checking account, the bank may return the check due to insufficient funds. Banks often charge penalty fees for insufficient funds.
Interest - Lenders charge a percentage of loan amounts as a fee for the loan, known as interest.
Interest Rate - The percentage charged in interest is known as the interest rate.
Invest - People who wish to earn a profit from their money may make purchases or place their money into specific types of accounts, known as investing.
Lien - A lender may place a lien on property in connection with a debt, giving the lender legal right to the property if the borrower defaults on the loan.
Loan - A lender and a borrower can make a legal contract for the borrower to use money given by the lender. The borrower usually pays interest for use of the money, and must agree to pay back the money within a specified time.
Minimum Payment - A loan may specify the smallest payment amount due by the borrower, which would be the minimum payment. Borrowers can pay more than the minimum payment.
Money Market Account - Investors may deposit money into money market accounts to earn interest on the balance. Investors must maintain a minimum balance.
Mortgage - The loan involved for purchase of real estate is a mortgage.
Mutual Fund - A group of investors may hold a collection of different types of assets together. This type of investment provides investors with diversification, which can reduce risks.
Overdraw - Attempting to withdraw money from an account, exceeding the account balance, is overdrawing the account.
Points - Lenders may add points to the principal amount of a loan. Points are a percentage of the loan amount, due as a lump sum payment.
Principal - The amount borrowed for a loan without interest is the principal. The amount of money invested by an investor is also the principal.
Profit - An investor may make a profit after subtracting the principal invested and any additional amount of money spent in connection with the investment.
Return - The amount of money returned to an account holder is typically referred to as the return.
Risk - The risk of an investment is the likelihood that the investor will lose money from the transaction.
Secured Credit Card - A young consumer trying to develop a positive credit history may use a secured credit card. With this type of account, the consumer deposits money to create a balance. The consumer can then make charges up to this balance to demonstrate responsible use of the account.
Securities - Securities may be paper or electronic instruments verifying ownership of stocks or bonds.
Service Charges - A financial institution may levy service charges to account holders for the upkeep and maintenance of bank accounts.
Share - Investors who own a piece of a corporation own a share of the company.
Sole Proprietor - When one person owns a company, this person is the sole proprietor of the company.
Stock - Companies may issue stock to investors to certify ownership of a part of the company.
Taxes - A government typically charges its citizens compulsory fees to help maintain the government.
Unearned Income - When people make money from interest, they are making unearned income.
Variable Expenses - Some expenses change from month to month, making them variable expenses. Examples of variable expenses include groceries or utility bills.
Withdrawal - Removing money from an account is known as withdrawing the money.