“It’s all about the money.”
In our previous article, “12 Finance Terms You Should Know to Navigate Money: Part 1“, we walked you through the realm of financial terminology to guide you through the financial world—assets, liabilities, debt, balance sheets, and a lot more.
But wait, there’s more! Just as language continuously evolves and expands, so does the financial landscape. Much like how a carpenter requires different tools and a complete toolkit to build the best furniture, a keen financial mind needs a comprehensive understanding of the language of money that comprises all financial terminology.
With that in mind, here’s the second part of this series where we’ll continue our exploration, unmasking additional financial terms that can open many doors for you in the world of money.
Additional read: Delve into how LakshMe helps women across India become financially independent
1. Net worth
Net worth is a basic finance term that applies to individuals as well as businesses. It is a snapshot of someone’s or a company’s financial situation. In simpler terms, net worth is the difference between what you own and what you owe.
It can be arrived at by subtracting liabilities from assets. If your assets exceed your liabilities, then you have a positive net worth. If your liabilities exceed your assets, then you have a negative net worth.
Investments are made with the idea to generate money in the future. An investment is any allocation of money that has the potential to drive profit, income, or value appreciation over time.
People often confuse savings with investment. When you save, you try to build capital for the future. When you make an investment, you commit your money to avenues that will help it multiply. Collecting money in a savings account is not an investment. If you use that money to buy stocks, bonds, or real estate, that is an investment. Businesses do the same—making investments to drive future income.
With regard to investments, risk is the possibility that your investment will fall short of your expectations or even result in a loss. For a business, risk can be thought of as events or circumstances that could potentially affect its operations, profitability, or ability to achieve its objectives in an adverse way.
Every financial decision comes with an element of risk. That’s why you should always weigh the risks of investment against potential returns and see how they match up.
The profit or gains you make from an investment are called returns. These could be in the form of an increase in the asset’s value, interest payments, coupon payments, dividends, or rent. For instance, if you invest in real estate, you could get returns in the form of monthly rent. When you decide to sell the property, you may get a higher value than what you had initially paid. These add up to your returns.
Risk and returns are financial concepts that go hand in hand. The higher risk associated with an investment, the higher the potential for return.
Additional read: Want to invest in Indian startups? Check out this guide.
Stocks are a type of investment representing ownership in a company and its profit. When you own stocks of a company, you become an owner to the extent of your investment. In turn, you get a certain share in the company’s profit and the power to vote on decisions. Stocks are also called equities.
Often, the terms shares and stocks are used interchangeably. However, a share is a fractional unit that you can invest in. A collection of shares that you buy are called stock. While both mean ownership in a company, a share is a single unit that can be bought and sold in the stock market, while stock refers to a bunch of shares.
Return on stock investments is not guaranteed and depends on the company’s performance.
A bond is another financial security you can invest in. They are issued by companies or the government to raise funds in the form of a loan. Instead of going to a bank, companies or the government take this loan from investors such as the general public, mutual funds, or pension funds.
In exchange for the money borrowed, they must pay an interest. Bonds are issued for a specific time period and unlike stocks, these provide an assured return. At the end of the holding period, you receive the investment amount or the principal back.
7. Financial planning
Handling money without a plan is a grave mistake. Financial planning is crucial to ensure that you make the most of your money. It involves taking stock of your financial situation, including income, assets, liabilities, payables, debt, etc to estimate how you will manage your money in the future. Financial planning involves setting financial goals and then outlining how you will meet them.
For businesses, financial planning is imperative to help them figure out how to allocate money to different teams, how much to produce, how much to pay employees, etc.
How many times have you heard your grandparents complain that the prices of things have shot through the roof? That’s because of inflation. To put it simply, inflation is the gradual rise in the prices of goods and services in a country over a period of time.
Inflation is unavoidable. However, if you make smart investments, you can beat inflation by multiplying your money at a rate faster than inflation.
Deflation is the opposite of inflation, wherein the prices of goods and services in the country gradually decline over a period of time. While this may sound positive in theory, it has damaging repercussions for an economy as a whole.
When prices fall, people will often delay purchases in the hope that they will decline further. As a result, producers will not make enough money. Eventually, this will lead to unemployment and an economic downturn.
“In life, nothing is certain but death and taxes,” said Benjamin Franklin. If you are a citizen of a country making money, then there’s no avoiding it. Taxes are compulsory payments levied on citizens and corporations by the government on income, purchases, and other economic activities.
Taxes give the government revenue to implement public work and services such as maintaining and building roads, providing free education, defending the country, etc. For instance, if you make an annual income over Rs 2.5 lakh in India, you will be subject to income tax under the old tax regime. The new tax regime taxes only those making an annual income of over Rs 3 lakh. GST is also a compulsory indirect tax levied on various products you buy in the country.
Credit is any amount of money you have borrowed from someone else to meet your financial obligations. This could be a loan, a line of credit, or a mortgage, and can be taken from financial institutions, suppliers, and other lenders. The amount has to be paid back in the future along with an interest. Typically, credit is sanctioned for a specific period of time and must be repaid in that duration.
Credit can give you the essential financial power you need to improve your future.
12. Credit score
A credit score is the ultimate report card for adults. It is a number that represents how likely you are to repay any money you have borrowed. Individuals and companies are assigned credit scores by third-party agencies that tell lenders how safe it is to lend to you.
If you have a high credit score, it will be easier for you to obtain a loan from a financial institution, along with favourable terms such as a lower interest rate. On the other hand, a low credit score will make it difficult for you to borrow money.
Taking control of your money
Navigating the financial world doesn’t have to be scary or difficult. The more you understand the language and financial terms, the easier it will be for you to follow along. These 12 finance terms along with our Part 1 article should have you covered to read and understand the basics of finance!