The terms and acronyms of finance can be perplexing, and it’s easy to become confused. Financial terminology can sometimes seem like an effort to use the most syllables or the longest string of letters possible to describe something. But it’s important to know what these terms mean when making your way through personal and business financial decisions. To help, here’s a glossary of some of the most-often searched financial terms and acronyms.
Assets are anything of economic value or future benefit that an individual, business, or organization owns. An asset can include real estate, stocks, cash, or even intellectual property. It’s in our firm’s name; we help you manage them.
Assets under management (AUM) is the market value of the investments managed by a person or entity on behalf of clients. AUM is used in conjunction with management performance and management experience when evaluating a company. When calculating AUM, some financial institutions include bank deposits, mutual funds, and cash, while others limit it to funds under discretionary management from individual investors.
Balance sheet. This is a financial statement that shows a company’s financial position at a specific point in time. It provides information about a company’s assets, liabilities, and equity.
Capital refers to the financial resources, such as money and assets, that individuals or businesses use to operate, invest, or expand. In general, capital is a critical component of running a business from day to day and financing its future growth. It can be categorized into various forms, such as working capital, human capital, or financial capital. Business capital may derive from the operations of the business or be raised from debt or equity financing.
Capital gains are the difference between how much something is worth now versus how much it was originally purchased for. Any gain, however, is only on paper until the asset or investment is actually sold. Taxes are paid on both short-term capital gains as regular income (a year or less) and long-term capital gains at a rate of either 15% or 20% (more than a year) when an investment is sold. The flipside is a capital loss, which is the decrease in the asset’s or investment’s value since it was purchased. A capital loss could help reduce your taxes.
Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to ending balance, assuming the profits were reinvested at the end of each period of the investment’s life span. CAGR is one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time. CAGR does not, however, reflect investment risk.
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 deposited, plus any interest accumulated over time. However, when borrowing, compound interest is charged on the original amount loaned, as well as the interest charges that are added to your outstanding balance over time. If a loan requires monthly payments (at the end of each month), interest steadily accumulates throughout the month. Compounding interest essentially means “interest on interest.” The interest payments change each period instead of staying fixed. Simple interest is based solely on the principal outstanding, whereas compound interest uses the principal and the previously earned interest. (Also see Interest.)
Consumer price index (CPI) measures the variation in prices paid by typical consumers for retail goods and other items. The federal government uses the CPI to make inflation adjustments to certain kinds of benefits, such as Social Security.
Defined benefit plan. More commonly known as a pension, this offers guaranteed retirement benefits for employees. Defined benefit plans are largely funded by employers, with retirement payouts based on a set formula that considers an employee’s salary, age, and tenure with the company. In an age of defined contribution plans like 401(k)s, defined benefit plans are becoming less and less common.
Defined-contribution plans expect employees to make most of the contributions—even though many employers may choose to provide some matching contributions. Defined contribution plan payouts aren’t guaranteed—they depend on employee contributions and the performance of the underlying investments.
Dividends are cash distributions paid out from a company’s earnings when it decides to transfer value to shareholders rather than reinvesting cash back into the business. Holding a dividend-paying stock can be a way of gaining regular income while allowing for the potential growth of your investment.
Earnings before interest, taxes, depreciation, and amortization (EBITDA). This can be a useful way to measure how efficiently a company is operating and how it compares to competitors. The EBITDA margin can be calculated by dividing the EBITDA by total revenue. (It’s also fun to say: Eh-Bit-Dah.)
Exchange-traded funds (ETFs). An ETF is a basket of securities that trades on an exchange just like a stock does. ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds, which only trade once a day after the market closes.
Federal Deposit Insurance Corporation (FDIC) is an independent agency created by Congress to maintain stability and public confidence in the nation’s financial system.
Federal Trade Commission (FTC) is an agency to protect the public from deceptive or unfair business practices and from unfair methods of competition through law enforcement, advocacy, research, and education.
Gross Domestic Product (GDP) is the total monetary or market value of all finished goods and services produced within a county’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.
Gross Income is the total earnings before taxes and deductions. It sets the stage for determining net income and helps in budgeting and tax planning. For an individual, this is how an annual salary is typically expressed. For a firm, gross income (also gross profit, sales profit, or credit sales) is the difference between revenue and the cost of making a product or providing a service, before deducting overheads, payroll, taxation, and interest payments. This is different from operating profit (see EBITDA).
Hedge funds are investment vehicles that pool capital from accredited investors to make a range of investments in an effort to make a positive return. These investments can be complex and highly risky. Hedge funds typically have more flexible investment strategies than, for example, mutual funds. Many hedge funds seek to profit in all kinds of markets by using leverage (in other words, borrowing to increase investment exposure as well as risk), short-selling and other speculative investment practices that are not often used by mutual funds. Hedge funds are not subject to some of the regulations that are designed to protect investors. Hedge funds are subject to the same prohibitions against fraud as are other market participants, and their managers owe a fiduciary duty to the funds that they manage.
Income statement. This is one of the three most important financial statements, along with the balance sheet and cash flow statement, used for reporting a company’s financial performance. It focuses on the revenue, expense, gains, and losses reported by a company during a particular period. An income statement is also sometimes referred to as a profit and loss statement.
Interest is the cost of borrowing money. It is also the earnings on savings and investments. Interest rates affect loans and savings. Interest is the monetary charge for borrowing money—generally expressed as a percentage, such as an annual percentage rate (APR). Interest may be earned by lenders for the use of their funds or paid by borrowers for the use of those funds. Accrued interest is accumulated interest that is unpaid until the end of the period. (Also see Compound Interest.)
Investment refers to the act of allocating money or resources to assets with the expectation of generating a return. Investment options include, but are not limited to, stocks, art, structured notes, bonds, funds, and real estate.
Liability is what an individual, business or organization owes to or has borrowed from others. Liability can also mean a legal or regulatory risk or obligation. Liabilities include loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses.
Liquidity describes how quickly your assets can be converted into cash. Because of that, cash is the most liquid asset. The least liquid assets are items such as real estate or land because they can take weeks or months to sell.
Net Worth is the difference between assets (what is owned) and liabilities (what is owed). This can be calculated by adding up the value of investments, the current market value of property and vehicles, and the balances in any checking, savings, retirement, or other investment accounts. Once any debt, including mortgage balance, credit card balances, and any other loans or obligations, is subtracted the resulting number will be net worth.
Personal consumption expenditure (PCE) is a measure of consumer spending and includes all goods and services bought by households in the United States. The Federal Reserve focuses on PCE in quarterly economic projections and also to set inflation goals.
Producer price index (PPI) measures the average change over time in selling prices received by domestic producers of goods and services.
Registered Investment Adviser (RIA). A financial firm that advises clients on securities investments and may manage their investment portfolios. Bowen Asset Management is an RIA.
Required Minimum Distribution (RMD) is a specific amount of money you must withdraw from a tax-deferred retirement account each year. For 2023, the age at which account owners must start taking RMDs went from age 72 to age 73, so individuals born in 1951 must receive their first required minimum distribution by April 1, 2025.
Return on investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost. ROI is expressed as a percentage and is calculated by dividing an investment’s net profit (or loss) by its initial cost or outlay. ROI can be used to make direct comparisons and rank investments in different projects or assets.
Shareholders’ equity is a firm’s net worth including preferred capital, retained earnings and reserves. A business with more assets than liabilities is considered to have positive equity or shareholder value. If assets are less than liabilities, a company has negative equity or owes more than it is worth.
Conclusion: (JAFH) Just Ask for Help
Trying to find your way through acronyms and jargon can be confusing. Seeking help from a financial adviser is always a good idea.
If you like reading our “Bowen Reports Blogs”, Bowen Asset does have a Facebook page: https://www.facebook.com/BowenAsset Please check it out as we frequently make comments on the page about not just finance and
economic events that happen in between our blogs.
As always, if you have any questions about this report or any other questions, please reach out to Bowen Asset at info@bowenasset.com or (610) 793-1001.
Disclaimer
While this article may concern an area of investing or investment strategy in which we supply advice to clients, this document is not intended to constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation or an offer to sell securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we and/or our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All expressions of opinion reflect the judgement of the author on the date of publication and are subject to change.
Past performance should not be taken as an indicator or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. As with any investment strategy or portion thereof, there is potential for profit as well as the possibility of loss. The price, value of and income from investments mentioned in this report (if any) can fall as well as rise. To the extent that any financial projections are contained herein, such projections are dependent on the occurrence of future events, which cannot be predicted or assumed; therefore, the actual results achieved during the projection period, if applicable, may vary materially from the projections.