08 important Financial terms a budding investor should know
Interestingly, 90% of the banking population (the term banking includes all types of financial institution and transactions) doesn’t understand or have difficulties in understanding some of the commonly used financial terms/words used by the bankers, advisors and brokers, we can refer these words as financial jargons, meaning of “Jargon” is “special words or expressions used by a profession or group that are difficult for others to understand.” But, when you are the in charge of your money, it is recommended to have the understanding of commonly used financial terms as it will help to keep your financial house in order.
Net worth
Net worth is the difference between your assets and liabilities, simply the difference between what you own in cash, property and equivalent and what you owe such as loans, mortgages and credit cards.
Your financial health is in order if your net worth is a positive figure and you have to work little hard if it is negative, but most people start with negative figure and with time you have to work it around.
CRIB / Credit Score
Most of us heard about CRIB, but there is an unwanted fear attached to CRIB and actually it has nothing to fear, CRIB is a short form of “Credit Information Bureau” and they collect all the credit information from the member institutions and store, Each and every facility granted by the banks and finance companies (including all member institution of CRIB) will be reported to CRIB on a regular basis. It includes all kind of advances inclusive of cheque returns.
Inflation
Inflation is an indication of an increase in the price of goods and services over time in an economy, often mentioned as a percentage, to do this, number of goods put in to a basket and the price of that particular basket and the day is stored as a base price of basket (commonly referred as Consumer Price Index and the base year is 2013), then it is compared over time to identify the change of percentage from the base year to today’s price of basket.
Compound interest
Compound interest is an interest you earn or pay on a rolling balance, assume you earn 5% for your 100 thousand investment on a monthly basis, provided that you don’t withdraw the return of 5%, your total balance will be 105 thousand by the month end, then the next month your return will be 5% of 105 thousand. It is a powerful tool for retirement savings as the return on your initial capital also gets a return.
AER (Annual Equivalent Rate)
AER stands for Annual Equivalent Rate, investopedia.com describes AER as “ interest rate that is actually earned or paid on an investment, loan or other financial product due to the result of compounding over a given time period”.
Bull market / Bear Market
A bull market is the condition of a financial market of a group of securities in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market but can be applied to anything that is traded, such as bonds, real estate, currencies and commodities.
A bear market is opposite to the bull market, the condition of a financial market of a group of securities in which the prices are declining, it’s generally accepted that a bear market is characterized by a drop of 20 % or more over a two-month period.
Asset Allocation
In very simple term, asset allocation is where you keep your money, assume that you have 1 million rupees, you bought a house for 5 MN, and you invested 2 Mn on a fixed deposit and 2 Mn on stocks and 1 Mn on savings. Now your asset allocation is
Property – 5 Mn
Stocks – 2 Mn
Deposit – 2 Mn
Savings – 1 Mn
Capital Gain
Capital gains are the difference between the current value of the asset class or investment and the original price of the same asset or investment, capital gains can be realized when the asset is sold, you may experience a capital loss if the asset class depreciated during the period.
What are the other financial terms an investor should know? Write to us and we will make sure that you will understand it. Write to us at ask@advisor.lk
