For many individuals, jargons can be difficult to grasp. And like all professions, the finance industry too has a set of jargons that are used on a daily basis. But as consumers, it is crucial for you to understand these jargons because they could help you in making important financial decisions. After all, you don’t want to stand dumbfounded while talking to a financial expert regarding your personal funds.
Hence, to get you through this web of words used in the finance sector, find below common jargons that you need to familiarise yourself with.
Page Contents
1. Inflation
This term indicates a stable growth in the normal prices for goods and services, with a decrease in the purchasing power per unit of money.
When talking about inflation, the value of money is perceived via the purchasing power. Hence, if the rate of inflation is high, the purchasing power is low. Inflation affects the economy while also directly affecting the investors.
2. Interest Rate
This is the rate at which you pay interest as a borrower for the money that you borrow from lenders. Interest rates can be fixed, floating, or reduced. The difference among the three is that a fixed interest rate remains constant throughout the term of a loan, a floating interest rate works in accordance with a base rate that is controlled by the RBI.
Floating interest rates are subject to change during the term of the loan and can affect your interest payable, thus resulting in the rise or fall of your monthly instalments. In the third case, which is the reduced interest rate, it is calculated on the basis of the remaining balance of your loan amount.
3. Time Value of Money (TVM)
This concept states that whatever the value of a certain amount of money is today, is much worth than what it will be in the future owing to its earning capacity. This means that money in hand today can be used for making more investments and earning larger gains, whereas the same amount will only yield less because of variables like inflation and interest rates.
4. Market Volatility
The fluctuations in the finance market that cause the rise or fall of investments unpredictably is known as market volatility. It refers to the risk involved in the amount of change of a security’s value for a given set of returns.
You can measure the market volatility by calculating the standard deviation of the annualised returns over a given period of time.
5. Asset Allocation
Asset allocation is a type of investment procedure that is designed to balance risk and rewards in investment by allocating a portfolio’s assets based on an investor’s risk tolerance, goals, and investment.
6. Net Worth
Net worth is the amount that is derived after subtracting your total debt from your overall financial investments.
7. Credit Score
If you have ever been to a bank to take out a loan or a credit card, credit score is the first thing that they will check as it defines your credit-worthiness. Your credit score reflects your payments history, defaults, and savings, which helps lenders assess whether you will be able to clear off your debts if a loan or credit card is sanctioned.
The greater your credit score, the more eligible you are for borrowing money from a financial institution.
8. Capital Gains
It is the increase in the value of an asset or investment, like a stock or real estate, above its original purchase price.
9. Rebalancing
Rebalancing involves buying or selling assets periodically to maintain your desired asset allocation.
10. Common Stocks
Common stocks, also commonly known as shares or equity, are investments that offer you part-ownership in a company and give you a claim on part of the company’s assets and earnings. Hence, the greater the number of stocks you own, the greater your ownership stake in the company is.
11. Term Insurance
Term insurance is a traditional form of life insurance, which offers life coverage for a specified “term” of years. So, after the demise of the life assured, the death benefit is paid to his nominees. This type of insurance only offers insurance cover and does not offer money back on maturity.
Term insurance is the cheapest and most recommended type of life insurance policy. The amount that you need to pay for keeping the term of insurance alive is known as premium.
12. Amortization:
This depicts the repayment of a personal loan or debt in regular instalments. Each instalment is split into two components- one of principal repayment and the other of interest.
13. Lending Rate:
The interest charged by the financier on the amount financed is known as the lending rate.
14. PDC:
Commonly known as Post Dated Cheques, these are issued in favour of the financier for repayment of a personal loan.
15. Prepayment Penalty:
If you happen to pay off the entire amount of a loan prior to the completion of its term, then this penalty fee is charged.
Conclusion:
Knowledge never hurts anyone and having yourself armed with these jargons in personal finance will make you more capable taking right decisions regarding money matters.
So, next time when you visit financial experts for advice on your funds, or to take out a loan, you will know what they mean when they utter any of these jargons, and you can have a decent and uninterrupted conversation.
