Financial Terminology You Find Inside

Glossary

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Understanding investing, budgeting and saving is made easier with knowing the language or jargon of the industry. To help you understand the jargon used in MoneyPacers I’ve taken the liberty of defining some of the language you’ll meet onsite. See below and always refer back to this page for help.

Annuity: A product offered by an insurance company or an employer to which one makes contribution(s) and immediately or later begins receiving payments, which usually last the rest of the annuitant’s life.

Annual rate of return: This is the annual rate of return you expect from your investments after taxes. The actual rate of return is largely dependent on the types of investments you select. Example., the Standard & Poor’s 500® (S&P 500®) for the 10 years ending Dec. 31st, 2013, had an annual compounded rate of return of 7.3%, including reinvestment of dividends. From January 1970 through the end of 2013, the average annual compounded rate of return for the S&P 500®, including reinvestment of dividends, was approximately 10.6%.

Bad debt – Debt becomes bad debt when the creditor has made all reasonable efforts to collect the debt but has been unable to do so. Often, this occurs when the debtor declares bankruptcy or when pursuing collection attempts further will cost more than the debt itself.

Bankruptcy – A legal declaration that one is unable to pay one’s debts and thus needs to have debts forgiven or reorganized. That is, bankruptcy is a legal proceeding in which a person or corporation has become insolvent, and therefore cannot pay his/her/its obligations.

Beta – Beta measures the responsiveness of a stock’s price to changes in the overall stock market. On comparison of the benchmark index for e.g. NSE Nifty to a particular stock returns, a pattern develops that shows the stock’s openness to the market risk. This helps the investor to decide whether he wants to go for the riskier stock that is highly correlated with the market (beta above 1), or with a less volatile one (beta below 1).

Borrow – To receive money from another party with the agreement that the money will be repaid. Most borrowers borrow at interest, meaning they pay a certain percentage of the principal amount to the lender as compensation for borrowing.

Broker – A person or firm that conducts transactions on behalf of a client and is paid commissions on orders, some offer advisory services.

Cash advance – Cash one receives from a credit card account such as a ATM. A cash advance usually carries a high interest rate, in part because credit cards have high interest rates anyway, and in part because the interest on a cash advance often begins to accrue immediately.

Cash flow – is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, limited period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company’s value and situation.

Chapter 7– In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property. Most liens, however (such as real estate mortgages and security interests for car loans), survive. The value of property that can be claimed as exempt varies from state to state.

Chapter 11 – Chapter 11 is a chapter of Title 11 of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to every business, whether organized as a corporation, partnership or sole proprietorship, and to individuals, although it is most prominently used by corporate entities.

Check – a bill of exchange drawn on a bank by the holder of a current account; payable into a bank account, if crossed, or on demand, if uncrossed.

Cashier’s check – is guaranteed by a bank, drawn on the bank’s own funds and signed by a cashier.[1] Cashier’s checks are treated as guaranteed funds because the bank, rather than the purchaser, is responsible for paying the amount

Commodity – A product or service that is indistinguishable from ones manufactured or provided by competing companies and that therefore sells primarily by price rather than quality or style.

Corporation – An entity such as a business, municipality, or organization, that involves more than one person but that has met the legal requirements to operate as a single person, so that it may enter into contracts and engage in transactions under its own identity.

Contribution frequency – The frequency of your contributions. The options are Monthly, Quarterly, or Annually. All contributions are assumed to be made at the beginning of the period.

Credit bureau – An organization to which business firms apply for credit information on prospective customers. TransUnion, Equifax and Experian are top examples.

Credit card – A plastic card having a magnetic strip, issued by a bank or business authorizing the holder to buy goods or services on credit. Also called charge card.

Credit report – Credit history or credit report is, in many countries, a negative record of an individual’s or company’s past borrowing and repaying, including information about late payments and bankruptcy. The term “credit reputation” can either be used synonymous to credit history or to credit score.

Credit score – A credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from credit bureaus.

Currency – use of this word refers to money in any form when in actual use or circulation, as a medium of exchange, especially circulating paper money. This use is synonymous with banknotes, or (sometimes) with banknotes plus coins, meaning the physical tokens used for money by a government.

Debt – is an obligation owed by one party (the debtor) to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.

Equities – An instrument that signifies an ownership position, or equity, in a corporation, and represents a claim on its proportionate share in the corporation’s assets and profits.

Equity finance – ownership in any asset after all debts associated with that asset are paid off. For example, a car or house with no outstanding debt is considered the owner’s equity because he or she can readily sell the item for cash. Stocks are equity because they represent ownership in a company.

Existing balance – Any existing balance for the accounts.

Financing – The act of providing or raising funds or capital.

Foreclosure – The act of foreclosing, especially a legal proceeding by which a mortgage is foreclosed.

Franchise – the right or license granted by a company to an individual or group to market its products or services in a specific territory.

Freddie Mac – The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac. The company buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security to investors on the open market. This secondary mortgage market increases the supply of money available for mortgage lending and increases the money available for new home purchases.

Futures or futures contract – an agreement to buy or sell a specific amount of a commodity or financial instrument at a particular price on a stipulated future date; the contract can be sold before the settlement date.

Hazard Insurance – insurance that provides protection against certain risks such as storms or fires. It’s also a promise of reimbursement in the case of loss; paid to people or companies so concerned about hazards that they have made prepayments to an insurance company.

Hedge fund – A pooled investment fund, usually a private partnership, that seeks to maximize absolute returns using a broad range of strategies, including unconventional and illiquid investments.

Heir – by civil law the person legally succeeding to all property of a deceased person, irrespective of whether such person died testate or intestate, and upon whom devolves as well as the rights the duties and liabilities attached to the estate.

Insider Trading – For purposes of insider trading, the definition is expanded to include anyone who trades a company’s shares based on material non-public knowledge. Insiders have to comply with strict disclosure requirements with regard to the sale or purchase of the shares of their company.

Insurance – An arrangement or agreement that protects someone from incurring future losses, as from damage, theft, illness, or death, especially a contract that transfers the risk of a specified loss to another party in exchange for the payment of a premium.

Insurance policy – is a contract (generally a standard form contract) between the insurer and the insured, known as the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for an initial payment, known as the premium, the insurer promises to pay for loss caused by perils covered under the policy language.

Intellectual property – Any of various products of the intellect that have commercial value, including copyrighted property such as literary or artistic works, and ideational property, such as patents, business methods, and industrial processes.

Interest rate – interest on an annual basis deducted in advance on a loan.

Invest– to commit (money or capital) in order to gain a financial return.

Investment – in finance, investment is buying or creating an asset with the expectation of capital appreciation, dividends (profit), interest earnings, rents or some combination of these returns.

IRA – a retirement plan that allows you to contribute a limited yearly sum toward your retirement; taxes on the interest earned in the account are deferred.

Lender – A creditor is a party (e.g. person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed.

Life insurance limited liability – is a part of the general insurance system of risk financing to protect the purchaser (the “insured”) from the risks of liabilities imposed by lawsuits and similar claims. It protects the insured in the event he or she is sued for claims that come within the coverage of the insurance policy.

Limited partnership – A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs). It is a partnership in which only one partner is required to be a general partner.

Line of credit – is credit source extended to a government, business or individual by a bank or other financial institution. A line of credit may take several forms, such as overdraft protection, demand loan, special purpose, export packing credit, term loan, discounting, purchase of commercial bills, traditional revolving credit card account, etc.

Living trust – a trust created and operating during the grantor’s lifetime – something (as property) held by one party (the trustee) for the benefit of another (the beneficiary) during their lifetime. The revocable living trust avoids probate, and lets you keep control of your assets while you are living — even if you become incapacitated — and after you die.

Loan – A sum of money that is lent, usually with an interest fee.

Loan officer – typically works directly for the lender such as banks and finance companies.

Long-Term Financial Plan – An investment plan or strategy with a term of usually longer than one year. A long-term financial plan involves more uncertainty than anything short-term because, typically, market trends are more easily predictable in the short-term.

Money – is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or government.

Mortgage – an agreement under which a person borrows money to buy property, esp a house, and the lender may take possession of the property if the borrower fails to repay the money. It’s also the deed effecting such an agreement.

Mortgage broker – acts as an intermediary who brokers mortgage loans on behalf of individuals or businesses.

Mortgage-backed security – is a type of asset-backed security that is secured by a mortgage, or more commonly a collection (“pool”) of sometimes hundreds of mortgages. The mortgages are sold to a group of individuals (a government agency or investment bank) that “securitizes”, or packages, the loans together into a security that can be sold to investors.

Mutual funds – are financial intermediaries. They are companies set up to receive your money, and then having received it, to make investments with the money. When you buy mutual fund shares, you are a shareholder — an owner — of that mutual fund, with voting rights in proportion to your ownership of the fund.

Net – profit or loss on a transaction. For example, in the sale of an asset, one calculates the net by taking the sale price and subtracting the outlay for buying or producing the asset. If the net is positive, one has made a profit; if it is negative, one has suffered a loss.

New contributions – Your periodic contribution. All contributions are assumed to happen at the beginning of the period.

Option – A contract that permits the owner, depending on the type of option held, to purchase or sell an asset at a fixed price until a specific date. An option to purchase an asset is a call and an option to sell an asset is a put. Depending on how an investor uses options, the risks can be quite high. Investors in options must be correct on timing as well as on valuation of the underlying asset to be successful.

Probate – The process by which a will is authenticated and carried out. That is, probate ensures that the will is in fact the decedent’s final wishes and that everyone is receiving what they ought to receive. The executor of the estate usually handles probate, but his/her actions can be challenged in probate court.

Real estate – land and the improvements on it. Real estate is one of the primary (and indeed one of the only) assets whose value does not depreciate over time.

Refinancing – To repay a loan by taking out another loan. Refinancing can allow one to secure a lower interest rate; for example, one can replace a loan at an 8.5% rate with one at 5.5%. In the case of a balloon loan, refinancing can repay the principal if one does not have sufficient funds to do it; that is, if one has made only interest payments over the life of the loan and has not saved the principal amount when the loan comes due, refinancing can prevent bankruptcy.

Retirement – disposal of a fixed asset at the end of its useful life. Retirement may result in a gain or loss, depending upon any compensation received for the asset and whether the asset is carried at a positive book value.

Reverse mortgage – is a home loan that provides cash payments based on home equity. Homeowners normally “defer payment of the loan until they die, sell, or move out of the home.” Upon the death of homeowners, their heirs either give up ownership to the home or must refinance the home to purchase the title from the reverse mortgage company.

S&P – is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.

Short-term financial plan – A financial plan outlining investment and other financial goals for the coming fiscal year. Short-term financial plans involve less uncertainty than long-term financial plans because, generally speaking, market trends are more easily predictable in the short term.

Stock market – A place, whether physical or electronic, where stocks, bonds, and/or derivatives in listed companies are bought and sold. A stock exchange may be a private company, a non-profit, or a publicly-traded company (some exchanges have shares that trade on their own floors).

Tax during contributions / withdrawals* Your estimated marginal tax rate. Use the table below to assist you in estimating your Federal 2014 tax rate.

Tax return – are reports filed with the Internal Revenue Service (IRS) or with the state or local tax collection agency (California Franchise Tax Board, for example) containing information used to calculate income tax or other taxes.

Trading – In finance, a trade is an exchange of a security (stocks, bonds, commodities, currencies, derivatives or any valuable financial instrument) for “cash”, typically a short-dated promise to pay in the currency of the country where the ‘exchange’ is located.

Years to contribute – Number of years you plan on making contributions.

Years of withdraws – Number of years you plan on taking distributions. Enter ‘1’ for a lump sum distribution. All distributions are assumed to happen at the beginning of the period.

Withdrawal frequency – The frequency of your distributions. The options are Monthly, Quarterly or Annually. All distributions are assumed to be taken at the end of the period.

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