Finance Term Glossary
Your essential dictionary for navigating the complex world of finance, from A to Z.
Amortization
The process of spreading out a loan into a series of fixed payments over time. While you pay each month, part of the payment goes toward interest and part goes toward the principal.
Example:"A 30-year fixed-rate mortgage is an amortized loan."
Asset Allocation
An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon.
Example:"A portfolio composed of 60% stocks and 40% bonds."
Bear Market
A market condition in which the prices of securities are falling or are expected to fall. Often associated with widespread pessimism.
Example:"A 20% drop in stock prices from recent highs often signals a bear market."
Bull Market
A financial market in which prices are rising or are expected to rise. It is the opposite of a bear market.
Example:"The post-2009 economic expansion was one of the longest bull markets in history."
Capital Gains
The profit earned from the sale of an asset, such as a stock or a house, for more than its purchase price.
Compound Interest
Interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan.
Example:"If you earn 5% on $100, next year you earn 5% on $105."
Dividend
A distribution of a portion of a company's earnings, decided by the board of directors, paid to a class of its shareholders.
Equity
In finance, equity is ownership. In a home, it's the market value minus the remaining mortgage balance. In a company, it's the value of shares.
Escrow
A legal arrangement in which a third party temporarily holds money or property until a particular condition has been met.
FICO Score
A type of credit score created by the Fair Isaac Corporation that lenders use to evaluate how likely a person is to repay a loan.
Inflation
The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.
Liquidity
The ease with which an asset can be converted into ready cash without affecting its market price.
Example:"Cash is the most liquid asset."
LTV (Loan-to-Value)
A ratio used by lenders to express the ratio of a loan to the value of an asset purchased.
Example:"If you put 20% down on a home, your LTV is 80%."
Mutual Fund
An investment program funded by shareholders that trades in diversified holdings and is professionally managed.
Net Worth
The total value of all assets owned by an individual or company, minus the total value of all liabilities.
Real Interest Rate
An interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower.
ROI (Return on Investment)
A performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments.
Test with CalculatorSIP (Systematic Investment Plan)
An investment vehicle offered by mutual funds to investors, allowing them to invest small amounts periodically instead of lump sums.
Test with CalculatorYield
The earnings generated and realized on an investment over a particular period of time. It's usually expressed as a percentage.
Why Terminology Matters
"Financial literacy is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources."
Interactive Learning
Use our glossary to understand the terms, then head over to our **Scenario Simulator** or **Savings Goal Planner** to put that knowledge into practice.