Between personal finance, investing, and accounting there are a lot of vocabulary, ratios, and technical terms. If this overwhelms you, then I have a special post for you today. Read on to see the ultimate ABC list for personal finance, investing, and accounting terms.
Quick Side Note:
Obviously, there is so much more than what is on this list, these are ones that I thought would be helpful to share! Also, if you like this post leave a comment and maybe I will do a part 2.
Before We Get Started:
Here are some other popular posts you may be interested in:
A is for Assets
If you are familiar with a company’s balance sheet you likely know the equation Assets = Liabilities + Stockholders’ Equity. But, what is an asset? An asset is something that will provide some sort of future economic benefit to a company. For example, land, inventory, building, cash, they can all be used in some way to generate sales, revenue, or other benefits in the future.
B is for Balance Sheet
As explained before the Balance is one of the 4 crucial financial statements that shows a company’s financial position at one point in time. The balance sheet can also be applied to your own life to understand what assets you have, minus any liabilities, leaving you with your approximate net worth. For example, if you own a $400,000 house and have $15,000 in the bank, but owe $200,000 in mortgage payments your net worth might be considered $215,000. Although, Robert Kiyosaki might argue differently about your house as an asset. Anyone who is familiar with Rich Dad Poor Dad knows what I am talking about!
C is for Current Ratio
One of the most common liquidity ratios when analyzing the financial position is the current ratio. It is calculated as Current Assets/Current Liabilities. Think about it, if you have $100 in short-term assets but owe $200 in short-term liabilities, you are unable to fulfill these payments without drawing down on more debt. This is why many investors want to see a current ratio of at least 1 or even higher for a better margin of safety.
D is for Debt
People are familiar with debt, but it comes in all different forms including student loans and credit cards. Debt provides leverage to companies because the interest expense is tax deductible and it only requires a fixed payment. For example, a $1,000,000 loan with a 5% interest rate requires an interest expense of $50,000 every year, but nothing more. Then, this $50,000 can be written off on the income statement before taxes, thus lowing taxable income and the amount of taxes paid. But, since it is a fixed obligation, even if the company has a rough year they need to figure out how to pay it.
E is for Equity
Equity is the alternative financing method to debt. When you invest in a stock, you are essentially buying equity or a small piece of the company. Equity is one of the popular financings for deals on shark tank. An entrepreneur comes in asking for $500,000 in exchange for 20% of their company. This is implying a valuation of $2,500,000 for the company since 100%/20% = 5 and 5 x $500,000 = $2,500,000. Yes, this is one of my favorite shows and if you want to learn more about it check out this post here:
F is for Forward PE
PE is a measure of Price/Earnings. If a stock is trading at $100 per share with EPS, earnings per share, of $5 this would be a PE of 20. Forward, PE is essentially the same calculation but with projected EPS. This is why sometimes on Yahoo Finance the regular PE won’t be available but the forward be is. This implies negative current EPS, but positive EPS in the future, which allows you to calculate the Forward PE.
G is for Gain
Gain is used for a lot of different reasons. If a company buys land and later sells it for more than the original cost this is called a gain, as long as it is not in the normal course of the business. In other words, if the company exists solely to buy and flip land, this would more than likely just be considered revenue. But, if a technology buys land for their office building but decides to relocate and sells the land for more, this would appear on the income statement as a gain. Gain is also what investors use to talk about their stocks market performance, usually in percentage or dollar terms.
H is for Hold
When reading analyst reports you will usually see variations of 3 different opinions, buy, sell, and hold. Buy and sell opinions are easy to understand and hold falls in the middle of the spectrum. It is a suggestion that if you do not currently own the stock, hold off on buying. But also, if you are a stockholder, it does not mean sell, just hold. Basically, do not initiate a transaction either way.
I is for Institutional Investor
People like you and me are considered retail investors, but companies with billions of dollars to invest are institutional investors. This can include hedge funds, financial service companies, higher education, companies investing pensions on behalf of their employees, mutual funds, and other similar investors.
J is for Junk Bonds
When it comes to bonds there are two classes of junk bonds and investment grade. The classification depends on their credit rating. The lower the rating, the higher the chance the bond will default and not make the payments. However, a lower rating means a higher potential yield, making these bonds much riskier. Typically below a BBB rating is considered junk bond territory.
K is for Kangaroos
This was actually one I was unfamiliar with and I had to do some research to find a K term. Supposedly, kangaroos are the slang name for Australian shares that are traded on the Australian Stock Exchange which is called All-Ordinaries Stock Exchange. I learned this from Investopedia so check out their article here.