Do you know the 10 most important financial concepts and their definitions?
Unless you’re a trained financial professional, comfortability with finance is often a responsibility left to accounting departments, and other employees tend to pay corporate finance and accounting issues no mind. Ignoring finance, however, will put you behind the competition when it comes to being well-versed in all the complex aspects of working in business.
No matter your profession or position within your organisation, if you have no idea what a bear market is or what CAPM stands for, it’s time to lose your fear of finance and begin embracing money matters head on. Start your journey to financial fluency by learning some basic financial terms and concepts!
Net worth is an easy one to start with. You may have heard the term in your day-to-day, from financial experts discussing a company’s net worth, to magazines discussing a certain celebrity’s value in dollars. In a business context, net worth simply means the difference between your total assets and total amount you owe to your creditors and other financial stakeholders.
A positive net worth indicates good financial health, whilst a negative net worth means your company is operating at a loss.
Without getting too much into the nitty gritty of corporate finance 101, inflation means the sustained increase in the price of goods and services over a certain period, in relation to the value of your national currency. One inflation indicator working professionals should look out for is if their income is rising proportionately with the national rate of inflation. Furthermore, if your organisation operates on a global scale, inflation can have an impact on your price point when selling outside your country’s borders.
This term indicates how accessible your assets are i.e., what monetary value your assets will generate if they’re bought or sold today. Corporations usually need to have a balanced liquidity since creditors can demand their money at any time, and the speed that your business can generate cash at may have a significant impact on its financial wellbeing.
Anthropomorphic idioms are always great fun, but what do bulls have to do with business? Simply put, a bull market means that the economy is on the rise. In terms of stocks, prices can rise and fall significantly throughout a daily trading period, so a bull market is reserved for referring to an extended period of time that the market is performing healthily.
What’s the opposite of bull? Bear of course! A bear market indicates that the market is declining. Typical indicators of the economy being in a low period include high unemployment and falling share prices for an extended period. The economy is constant flux between bull and bear markets, so knowing the difference will help you stay on top of the ever-changing economic landscape.
It’s slightly trickier to nail down a concrete definition of this term, but in general risk tolerance is an indicator of how aggressive one is willing to be with their investments. Investors with high risk tolerance are typically willing to make investments for more money for a shorter period of time (i.e., higher stakes investments) while those with low risk tolerances tend to make long-term investments for smaller amounts of money (i.e., lower stakes investments).
Both of these terms are key aspects of most people’s investment strategies. While you may have heard them tossed around, do you actually know what they mean?
Determining your portfolio's asset allocation means deciding on the volume and type of assets with the best risk-return balance, in accordance with your risk tolerance and overall investment objectives.
Closely related to asset allocation, in layman’s terms diversifying your portfolio simply means investing in a wider variety of types of assets, rather than putting all your investment eggs in one single basket. A common risk-management strategy, it’s widely believed that a more diverse portfolio is less risky and will yield larger returns over the long term.
Of the various kinds of interest you may encounter in the world of corporate finance and accounting, simple interest is (quite fittingly) the most straightforward. It’s important to read through the terms of a financial agreement to know what kind of interest you’ll be accruing, as the amount you’ll need to pay back or potentially earn, can differ significantly! Simple interest is a small percentage of the principal balance of your loan or deposit, charged or payed out on a regular basis (monthly, yearly, etc.) by your creditor or financial institution.
This term is slightly more complicated than its simple counterpart, but don’t fret!
If you’re being charged or payed compound interest, the amount you pay or receive on a regular basis will be the interest rate on the principal balance or deposit, compounded with previously accrued interest. Being fluent with different types of interest is of key importance before entering into any kind of financial agreement.
The CAPM is one of the most common terminologies and models used in corporate finance and allows businesses to price investments based on the expected return rate. Especially when it comes to risky securities, CAPM is an invaluable tool to help corporate finance professionals evaluate which investments are best suited to the overall goals of their organisation.
No matter your sector, profession or level of seniority, understanding commonly used financial concepts will help you prove your knowledge and get ahead in the world of business. From the corporate sector to non-profits and everything in between, finance and accounting are omnipresent realities for all workers, and gaining fluency today will bring success for the future.
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