5 Basic Finance Terms Everyone Should Know

(featured image by gotcredit.com)

We all have different interests and skill sets, but it’s no secret that we should all teach each other what we know because learning is FUN (and you’d be able to answer more Jeopardy questions that way!). So for those of you who have no business background–or do but have forgotten–and would like to learn some basic terminologies, read on! You never know when these things might come up in conversation, or even in a job interview.

1 and 2. Stocks, bonds, and how they differ from each other.

An investor has a lot of options of where to put his or her extra money, and two of those options are stocks and bonds. Simply put, stocks are equity while bonds are debt. When you purchase a stock of a company like Google, you are purchasing a piece of ownership. You become a shareholder, because you own a share of stock in the company. One major difference between the two investments is the risk they involve: Stocks can either skyrocket, or plummet.

Let’s say that today, you bought 5 shares of Google for $500 each (for a total of $2,500). Exactly one year later, you check and see that one share of Google is priced at $1,000. The 5 shares of Google that you own now has a value of $5,000, which you can either hold if you believe the price will increase even more, or sell, if you think the price will go down, or if you just want to get your money back already. On the other hand, it’s also possible that after buying shares for $500 each, the price drops to $250 each, cutting your investment in half.

Stocks have the potential to provide extremely high returns, but also have the ability to make you lose money. This is far from gambling in a casino, though, as there are many ways you can evaluate a stock before making purchase to see its earnings potential.

If you have a lower threshold for risk and want something that’s safer, you would go for bonds. Instead of having an equity stake in a company, you are lending your money as a creditor. When you buy a bond, there will be terms attached to it, such as the maturity date (when the bond will end), the coupon (the interest they’ll pay you for lending your money), the payment frequency (how often they’ll pay you your coupons. Semi-annually? Annually?), and the face value (how much you’ll get at maturity). Bonds can either be purchased at a premium, discount, or par…but no need to worry about that right now!

3. Liquidity

When something is liquid, it spills easily. It transfers easily. In finance, liquidity is how fast you can get rid of something and turn it into cash. It is especially important to know how much liquid assets a company has when it’s being evaluated by investors, because they want to know how easily the company can convert their stuff into cash to pay them back if shit hits the fan. Cash is the most liquid of all, because it’s already cash. If you drop even just a dollar bill on the busy sidewalks of New York City, it would be gone in a second. Drop an old mattress and you’d probably get ticketed for littering… the point is, if it’s something that nobody would want to buy, then it’s not very liquid. Your checking account is liquid, because you can easily take the money out. Stocks are considered liquid because they’re rather easy to sell (although some stocks are more liquid than others). Houses aren’t as liquid, because it takes months or even years to sell them. Crocs aren’t liquid.

4. IPO

IPO stands for “Initial Public Offering,” or a company going public. When a company has its IPO and goes public, that means that your everyday investor, including most of us, can now buy shares of stock and become part owners of that company. As a public entity, their financial records including income, assets, debt, and other data that were once heavily guarded become accessible to anyone. Facebook and Twitter are some of the many companies that have gone public recently: 2012 and 2013, respectively.

5. Dow Jones

Chances are, you have heard people talk about how the “Dow Jones is down 2%,” but never really took the time to find out who or what Dow Jones is. That’s what Kashkore is here for! The Dow Jones Industrial Average is an index that tracks 30 of the most significant stocks traded on the New York Stock Exchange (NYSE) and Nasdaq. By following how those giants are doing, the Dow Jones is able to give traders a summary, or a look at the overall health of the market at any given day. There are other indices that exist, such as the S&P 500. However, when people say “the market is up,” they are usually referring to the Dow.


Conclusion

There you have it! If you didn’t know any or all terms listed on this page, then I hope you learned something new. Even if business or finance isn’t your thing, hey, a little bit of extra knowledge never hurt anybody.


(THE FEATURED IMAGE HAS BEEN EDITED ON ADOBE LIGHTROOM. LINK TO LICENSE HERE.)
kashkore

kashkore

I write about exceptional people in pop culture and business, and about things related to money, style, and life.

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