8 Banking & Investment Terms You Should Know
If you're new to finances and keep hearing phrases and terms that sound unfamiliar, don't worry. While banking and investing may seem complicated at first, learning common and often-used terms can help simplify this new terrain.
Compound interest is interest on the amount of money you have deposited or borrowed.
When investing or saving, compound interest is earned on the amount you've deposited, plus the interest earned over time.
When borrowing, compound interest is charged on the original amount, as well as interest charges added to the outstanding balance.
FICO® is an acronym for Fair Issac Corporation, the company that came up with the methodology used to calculate a credit score.
Your score is based on several factors including payment history, length of credit history, and total amount owed.
Scores range from 300 to 800. The higher the score, the better terms you may receive on a loan or credit card.
You calculate Net Worth by first adding all the money or investments you have, including the current market value of your home, car, as well as balances in checking, savings, investment, and retirement accounts.
Then, subtract all of your debt, including mortgage balance, credit card balance, and any other loans or obligations.
The resulting number is your Net Worth
Simply put, asset allocation is where you choose to put your money.
Three major asset classes are stocks, bonds, and cash.
Each of these react differently to conditions in the market and the economy, so talk to your financial advisor to develop a strategy that works for you.
Capital Gains are the difference between how much something is worth now versus what is was worth when originally purchased.
The gain is only on paper until the asset or investment is sold.
You pay taxes on both short-term (a year or less) and long-term gains (more than a year) when you sell.
Rebalancing is a standard practice in any investment portfolio. It's the process of bringing your stocks and bonds back to your target percentages.
Let's say your target is 60% stocks, 20% bonds, and 20% cash. If the stock market has performed particularly well over the last year, your allocation may have shifted to 70% stocks, 10% bonds, and 20% cash.
To rebalance your portfolio, you could sell some of your stocks and reinvest that money in bonds, or invest new money in bonds to bring the portfolio back to the original target.
Sometimes referred to as "fixed-income securities," bonds are essentially investments in debt.
When you buy a bond, you're lending money to an entity, typically the government or a corporation, for a specified amount of time at a fixed interest rate.
You then receive periodic interest over time, and get back the loaned amount at the bond's maturity date.
Bond prices tend to move in the opposite direction of interest rates: when rates rise, bond prices typically fall.
Also called equity or shares, stocks give you ownership in a company.
When you buy stocks, you become a company shareholder, giving you a claim on part of that company's assets and earnings.
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