99 terms

Finance Glossary

The key vocabulary of Finance, each term defined in plain language. Start learning in the Finance subject, or drill these terms as flashcards.

Asset allocation: How a portfolio is divided among asset classes, typically shifting from growth toward stability as a goal nears.
Asset class: A category of investment that behaves in a broadly similar way, such as stocks, bonds, or cash.
Bank run: A situation where many depositors withdraw at once, fearing a bank cannot pay, which can make the fear self-fulfilling.
Behavioral finance: The study of how psychology and cognitive bias influence financial decisions, often departing from purely rational models.
Beneficiary designation: A named recipient on an account or policy, which usually passes directly to them outside a will.
Bill of exchange: A written order to pay a sum, an early credit instrument that let merchants trade across distances.
Blockchain: A shared, tamper-resistant digital ledger of transactions maintained across many computers.
Bond: A loan to a government or company that pays interest; generally steadier than stocks but exposed to interest-rate risk.
Bonds: Lending to a government or company in exchange for interest and return of principal.
Bretton Woods system: The post-1944 system tying major currencies to the US dollar, which was convertible to gold until 1971.
Budget: A plan allocating net income to obligations, saving, and discretionary spending.
Business cycle: The economy’s repeated pattern of expansion and contraction over time.
Central bank: A public institution that manages a currency, sets key interest rates, and oversees the banking system.
Coinage: Standardized metal money stamped by an authority; the first coins are dated to Lydia around the 7th century BCE.
Commodity money: Money whose value comes from a useful commodity it is made of, such as gold, silver, or salt.
Comparative advantage: The principle that mutual gains from trade arise when each party specializes where its opportunity cost is lowest.
Compound interest: Interest calculated on principal plus everything previously earned.
Consumer Price Index (CPI): An index tracking the average change in prices of a basket of goods, used to measure inflation.
Corporate finance: Raising capital, allocating it between projects, and returning value to owners.
Credit: The ability to borrow or defer payment.
Credit risk: The risk that a borrower fails to repay.
Cryptocurrency: A digital asset secured by cryptography and recorded on a decentralised ledger, without a central issuer.
Debt: Borrowed money.
Depreciation: The decline in an asset’s value over time, notably for cars, which lose value quickly after purchase.
Diversification: Spreading holdings so no single failure is decisive; protects against specific, not general, risk.
Dollar-cost averaging: Investing a fixed amount at regular intervals regardless of price, smoothing out the effect of market swings.
Double-entry bookkeeping: An accounting method recording each transaction as a debit and a credit, popularized by Luca Pacioli in 1494.
Effective tax rate: Total tax paid divided by total income — the average rate, usually lower than the top marginal rate.
Emergency fund: Reserved money for unexpected essential expenses; its value is the costly decisions it prevents.
Estate: Everything a person owns and owes at death, to be distributed according to a will or law.
ETF: An exchange-traded fund — a pooled, diversified fund that trades on an exchange like a stock.
Exchange rate: The price of one currency in terms of another.
Expense ratio: The annual fee a fund charges as a percentage of the money invested; small differences compound greatly over time.
Fiat money: Money that has value because a government declares it legal tender and people trust it, not because it is backed by a commodity.
Finance: The management of money, assets, and risk across time.
Financial independence: Having assets or income sufficient to cover living expenses without relying on active employment.
Financial resilience: The capacity to absorb money shocks — job loss, emergencies — without lasting harm.
Fiscal policy: The government’s use of spending and taxation to influence the economy.
Fixed expenses: Obligations that stay roughly constant and resist quick change.
Fractional reserve banking: A system in which banks hold only a fraction of deposits as reserves and lend out the rest.
Future value: What a present sum may become over time.
Gini coefficient: A measure of income inequality ranging from 0 (perfect equality) to 1 (maximum inequality).
Goal-based saving: Setting money aside for specific named goals, matching where you keep it to the goal’s time horizon.
Gold standard: A monetary system in which a currency’s value is fixed to a set amount of gold.
Gross domestic product (GDP): The total value of goods and services a country produces in a period; a common measure of economic size.
Gross income: Earnings before deductions.
Index fund: A fund tracking a market rather than attempting to beat it; low cost by design.
Inflation: A general rise in prices, reducing the purchasing power of money over time.
Inflation risk: The risk that returns fail to keep pace with rising prices; the risk that punishes over-caution.
Insurance premium: The regular payment made to keep an insurance policy in force.
Intestate: Dying without a valid will, so the law decides how your estate is distributed.
Investing: Committing resources to assets expected to generate growth or income.
Leverage: Using borrowed money to amplify an investment; it magnifies both gains and losses and can spread crises.
Lifestyle inflation: Spending rising to absorb increased income.
Liquidity: How quickly an asset can be converted to cash at a fair price.
Longevity risk: The risk of outliving your savings because you live longer than planned.
Loss aversion: The tendency to feel losses more strongly than equivalent gains, which drives poorly timed selling.
Marginal tax rate: The tax rate applied to the next dollar of income, as opposed to the average rate paid across all income.
Market failure: A situation where a free market produces an inefficient or harmful outcome, such as pollution externalities.
Market risk: The risk of broad price declines regardless of individual merit.
Medium of exchange: Anything widely accepted as payment for goods and services, one of the core functions of money.
Mental accounting: Treating money differently depending on where it came from or what it is "for", rather than as interchangeable.
Monetary policy: A central bank’s actions on interest rates and money supply to influence the economy.
Money creation: The process by which commercial bank lending expands the amount of money in the economy.
Money supply: The total amount of money circulating in an economy.
Net income: What actually arrives after tax and other withholdings; the number to budget against.
Opportunity cost: What is given up by choosing one use of money over another.
Personal finance: Finance at the household level: earning, budgeting, saving, borrowing, investing, protecting.
Ponzi scheme: A fraud that pays earlier investors with money from newer ones, collapsing when new money runs out.
Present value: What a future sum is worth today; makes offers at different dates comparable.
Price discovery: The process by which buying and selling in a market establishes the price of an asset.
Public finance: Government taxation, borrowing, spending, and investment.
Real value: A value adjusted for inflation, reflecting actual purchasing power, as opposed to the nominal face amount.
Return: The gain or loss actually realised.
Risk: Uncertainty about outcomes.
Risk capacity: The financial ability to absorb loss without damaging goals.
Risk tolerance: Emotional comfort with uncertainty.
Risk transfer: Paying a small, certain premium so that someone else bears a rare but catastrophic loss — the basis of insurance.
Rule of 72: A mental shortcut: the years for money to double is roughly 72 divided by the annual percentage return.
Saving: Setting money aside prioritising safety and access over growth.
Scarcity: The basic economic condition that resources are limited, so every choice involves a trade-off.
Secured debt: Borrowing backed by collateral; cheaper because the lender's risk is lower.
Simple interest: Interest calculated on the original principal only.
Sinking fund: Money saved gradually toward a known future expense so it does not become a shock.
Speculative bubble: A rapid rise in an asset’s price far above its fundamental value, driven by expectation and euphoria.
Stock: A share of ownership in a company; higher expected long-run return with higher volatility.
Stocks: Ownership shares in a company.
Supply and demand: The forces of what sellers offer and buyers want, which together tend to set a market price.
Tax bracket: A range of income taxed at a particular marginal rate under a progressive tax system.
Tax-advantaged account: An account that defers or reduces tax to encourage long-term saving; specific rules vary by country and change over time.
Time horizon: How long before money is needed; determines how much volatility is tolerable.
Time value of money: The principle that money today is worth more than the same amount later.
Total cost of ownership: The full cost of owning something over time — purchase price plus financing, maintenance, insurance, and depreciation.
Tulip mania: A 1630s Dutch episode of soaring tulip-bulb prices, often cited as an early asset bubble.
Unsecured debt: Borrowing without collateral; more expensive for the same reason.
Variable expenses: Costs that fluctuate and can flex under pressure.
Volatility: How much an investment’s value swings up and down; higher volatility is the price of higher expected return.
Will: A legal document stating how you want your assets and responsibilities handled after death.
Withdrawal rate: The percentage of a retirement portfolio taken out each year; a lower rate is more likely to last.

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