11 Terms that will help you explore the Financial world

Financial Literacy helps you to cover the gap between you and your financial goals, however it is imperative to understand the language in which financial analyst speaks or understand the terminologies used on CNBC, Bloomberg, Economic Times and Moneycontrol. To help you better understand, I have written the technical meaning first , then the less literal ,more truthful meaning second.

Credit 

Bank credit is the total borrowing capacity banks provide to borrowers.  Your credit worthiness established by the bank determines your credit limit to purchases goods or services.

Say, if you need to buy a Playstation but haven’t got money for it right now, you can always count on your credit card to have your back. But, one should only use credit if they can pay it back next month.

Inflation

General rise in the prices of goods and services, over a period of time, is referred to as inflation.

Ever heard your parents or grandparents saying, “When we were young, in Rs 20 we used to get the groceries for the entire month”, what do you get in Rs 20, a cigarette and few gums. Observe, this transition revolves around the concept of inflation.

Net worth

The difference between the total amount of assets and liabilities that an individual has. It depicts the economic position of the individual and also his wealth.

No more showing off, this will accurately tell about your status to the world, best thing about it, not everyone gets to know each other’s net worth. This is something that you would not want to share with everyone and keep your asset information to yourself.

Insurance

It is a contract between the insured (the policy holder who is paying the premium) and insurer (who receives the premium and takes care of the insured in monetary terms as and when needed).

When you were young and played cricket, you remember the neighbour’s window that you broke or the glass of your father’s best friend car you hit with a ball? Who paid for the damage? Obviously, your parents paid for it, in this case think of your parents as the insurer and yourself as the insured with one major difference that you did not pay any premium and were still insured by them. Unfortunately insurance companies do not work that way and require you to pay a premium to cover for your losses, if any. 

 Investment

An investment is referred to as purchase of an asset that will provide future economic benefit. It may generate income or maybe kept for the purpose of capital appreciation i.e. sold at a later date for profit.

Let’s assume you have a house in Delhi and a beautiful house in Goa. Excited yet? Now your tenants in Goa pay you rent for use of your property, this can be referred to as an investment, as the property value will increase over time and you may sell that property at a higher price than you bought it for i.e. capital appreciation plus you are getting periodic rent.

Savings

The amount that is left from your income after making all the purchases that you felt necessary at the time. Also, we can say deposits that are kept aside for future.

Your savings as a child were kept in a piggy bank, when you grew older your savings increased and you needed a larger piggy bank, so you went to the bank to help you secure your money. As soon as the bank accepted your deposit it started giving you some return/interest for trusting the bank with your money.

Interest Rate

When a lender charges some percentage of principal for use of the lent money from the borrower it is termed as interest rate. If you take a loan from your bank you have to pay certain amount as interest and that amount is generally 9-12% of the principal depending upon the type of loan taken. Similarly, when you deposit money in your bank account, the bank automatically becomes the borrower and you become the lender so the bank pays you certain amount generally 3-4% as interest.

You must be wondering why banks have low deposit rates and high lending rates, for that you need to understand that with the money you deposit in the bank, the bank keeps aside some for liquidity and lends the remaining at a higher interest rate, this process is called credit creation and is the core of banking business.

Stock

It is an instrument that gives you part ownership or a fraction of an organization’s asset and profit depending upon the number of shares that you own of the organization. Shares are referred to as unit of stock.

Think of stocks like car-pooling, you don’t technically own the car, yet you are in it till you reach your destination, you do not pay the whole amount for the car, just a fraction of amount for the service delivered, anything good or bad happens to the car it automatically affects you, you hope to reach your destination in time but if the car breaks down you look for a new one. 

Taxes

Taxes are fees that an individual and corporations pay to the government for the services offered by them. It is the responsibility of every citizen to pay taxes if they earn an amount which is taxable by the government.

Something we don’t like to do but have to do as it is an enforcement by the law. We use roads, railways, flights, malls and for that matter whatever we use in a country are in some way managed and regulated by the government and for that they charge you some amount so as to keep maintaining those services for your convenience

Budget

An estimation of all your earnings against your expenses. If your income is more than your expenses you are financially in a good position and this term is called Net income. However if your income is less than your expenses, it is considered as net loss and you need to cut-down your expenses or soon you will see yourself borrowing to sustain.

Think of it as how you use your salary or pocket money, you generally know your expenses and plan your week or month in accordance with the amount that you receive, this planning is called budgeting.

 

Loan

Loans are the most common form of debt (borrowings). A loan is money or property given to someone who will pay back the principal amount with some interest for using it. Loans are generally given for a specific period of time wherein the borrower makes equated monthly installments so as to repay the lender.

Did you go to the bank for your dream house and they assured you that they can buy it for you after completing few formalities? Did you buy that new IPhone with just Rs 20,000 in your bank account and the rest was taken care by some financial institution? All these are some examples of loan that you get from the financial institutions.

 

Team Investoday