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When it comes to making financial decisions, it’s important to understand the terms that are involved. This can help you make better decisions and avoid mistakes that could cost you later down the road. While these terms may seem like gibberish at first glance, they’re actually quite simple once you break them down into their basic components.
Now, let’s take a look at a few financial key terms that you should know in 2023.
Amortization is the gradual reduction in the amount of debt. It is a repayment plan that spreads the cost of a loan over its lifetime, which reduces the total amount paid in interest and allows you to pay off your loan faster. In this way, the amortization can be thought of as paying off your debt early.
The amount of interest paid on the loan is less than the amount of interest paid in the first year because more principal is being repaid every month than just what was borrowed at origination (this means there will be no balloon payment).
An asset is a resource owned by a person or business. Assets can be tangible or intangible and include things like buildings and equipment, land, inventory and accounts receivable.
The financial worth of a company or person can be calculated by adding the value of all of their assets and cash. However, inflation can have a great impact on these. Depending on what causes inflation in a given economy, the effects could worsen over time, causing the value to depreciate more and more as time goes on.
A balance sheet is a financial statement that shows a company’s assets, liabilities and equity. The balance sheet shows the general state of a company’s finances at a single point in time.
Equity is the difference between assets and liabilities. Equity is a company’s net worth and is calculated by adding up all of its assets and subtracting all of its liabilities.
Capital gain is the profit made when an asset is sold for more than it cost.
There are two types of capital gains: realized and unrealized. Realized capital gains are taxed at different rates depending on your income tax bracket. Unrealized gains are not taxed until they are realized, which could be years after they were originally earned.
Capital gains can be realized or unrealized in various ways, including selling a stock or mutual fund (in which case it’s called a “dividend”). They can also be realized by selling property (like real estate) or selling collectibles like art or vintage clothing and jewelry, which often have a higher value than their original purchase price, due to inflation.
Capital markets are financial markets in which long-term debt instruments such as bonds, debentures and commercial paper are traded. They also include the money market, which is used to finance long-term projects.
In the capital market, there are two types of securities: equity securities and debt securities. An equity security represents ownership in a company while a debt security simply represents an obligation from one party (the borrower) to repay another party (the lender).
A dividend is a portion of a company’s earnings that is distributed to its shareholders. Dividends are usually paid out quarterly and they can be paid in cash or stock.
In some cases, companies will reinvest their excess profits into growing the business instead of paying out dividends; this is called retained earnings.
Reinvestment is the reinvestment of dividends or interest income. Reinvesting your returns can be a great way to increase your investment and create a higher return on investment (ROI).
Reinvesting involves setting aside some portion of each payment received from an investment as well as any other income generated by those funds, such as interest earned from lending out money through peer-to-peer lending sites.
Understand the terms to make better financial decisions
Key financial terms are important to understand because they’re used in financial statements. Financial statements help you make better decisions about your money and investments.
Financial statements are published by companies, governments, and other entities (like mutual funds) that have assets or liabilities. Investors use these reports to assess the financial health of an organization before making an investment decision or lending money to it.
While it may seem like a lot of jargon, financial terms are essential to understand if you plan to invest. And with the advent and rising popularity of cryptocurrencies, there’s more and more terminology to learn all the time, so be sure to keep up as best you can.
By learning the definitions of these words and phrases, you’ll be able to make better decisions when it comes time for you to invest or save money.