Part of gaining financial literacy is becoming familiar with the lingo.
Like all subjects, finance has its own terms, acronyms, abbreviations, and slang.
If you’re just beginning to dip your toe into the pool of personal financial planning, here’s a handy guide to some terms that are likely to come up when learning about finance and investments.
ROI: ROI stands for Return on Investment. It’s an acronym usually used when referring to the performance of a stock. ROI can also refer to the performance of other investments, including real estate and currencies. In short, the term describes how much bang you get for your investment buck.
Compound Interest: Compound interest refers to the instance of interest collecting on interest. The best way to understand compound interest is with an example. Let’s say you invest $1,000 in a high interest bearing account. Over the course of one year, your savings collects $100.00 in interest. The next year you’ll earn interest on $1,100.00, and so forth.
Money Market Account: You may hear about money market accounts if you’re shopping for a savings account. A money market account is like a savings account, but it may earn higher interest rates – making it a better choice for some.
There are money market accounts that come with checks or a debit card, so your funds are easily accessible. If you’re planning on opening a money market account to hold your savings or emergency fund, pay attention to any minimum balance requirements and fees.
Liquidity: Liquidity refers to how easy it is for an asset to convert to cash. You can think of it as an investment’s ability to “liquidate” into cash. For example, real estate investments may offer great returns over time, but they aren’t considered liquid assets because they are not easily turned into cash.
A stock or bond, on the other hand, has high liquidity because you can sell a stock and have access to its cash value quickly.
Roth IRA: A Roth IRA is a retirement savings account. IRA stands for “Individual Retirement Account”. A Roth IRA allows you to make contributions or deposits to fund your retirement. The contributions are made with taxed income, but when you take deposits from the account in retirement, the income is not taxed.
A few characteristics of a Roth IRA:
- Your contribution is always accessible, tax and penalty-free at any time
- It can help keep you in a lower taxable income bracket during retirement
- You can contribute to a Roth IRA at any time if you have a job
Bear Market: A Bear Market is a term used to refer to the stock market while there are certain characteristics present. Those characteristics include falling stock prices and low investor confidence.
The term is said to originate from the way a bear attacks – swiping its arm downward on its prey. The downward motion illustrates falling stock prices as investors lose confidence, become pessimistic about the market, and they may begin to sell their stocks to try to prevent further losses.
Bull Market: A Bull Market is a period in which stock prices are increasing and investor confidence is high. A Bull Market mostly refers to stocks, but it can also be used to describe real estate, currencies, and other types of markets.
This term may come from the action of how a bull attacks, by swiping its horns upward.
Finance lingo is for everyone
No matter where you are on the personal finance spectrum – just beginning to create a budget with your first job or preparing to retire – there are special terms to describe financial phenomena, tools, and features. Learning some of the lingo is a great first step toward taking charge of your financial life!