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finance Glossary
Explore clear, concise definitions for finance terms. Each entry is written for fast comprehension and quick reference.
Featured finance Terms
Start with the most referenced concepts
1099 Form
A series of documents the IRS refers to as "information returns".
401(k)
A feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.
Amortization
The process of spreading out a loan into a series of fixed payments over time. You'll be paying off interest and principal in different amounts each month, although your total payment remains equal.
Angel Investor
A high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company.
APR (Annual Percentage Rate)
The annual rate charged for borrowing or earned through an investment. APR includes not just the interest rate but also other fees or costs involved in procuring the loan.
APY (Annual Percentage Yield)
The real rate of return on an investment taking into account the effect of compounding interest.
Amortization
The process of spreading out a loan into a series of fixed payments over time. You'll be paying off interest and principal in different amounts each month, although your total payment remains equal.
Angel Investor
A high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company.
APR (Annual Percentage Rate)
The annual rate charged for borrowing or earned through an investment. APR includes not just the interest rate but also other fees or costs involved in procuring the loan.
APY (Annual Percentage Yield)
The real rate of return on an investment taking into account the effect of compounding interest.
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.
Asset Class
A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations.
Balance Sheet
A financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time.
Basis Point (BPS)
A unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument.
Bear Market
A condition in which securities prices fall 20% or more from recent highs.
Beneficiary
A person or entity entitled to receive the claim amount and other benefits upon the death of the benefactor or on the maturity of the policy.
Blockchain
A shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network.
Bond
A fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental).
BRRRR Method
A real estate investment strategy: Buy, Rehab, Rent, Refinance, Repeat.
Budget
An estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis.
Bull Market
A financial market of a group of securities in which prices are rising or are expected to rise.
Cap Rate (Capitalization Rate)
A metric used in real estate to indicate the rate of return that is expected to be generated on a real estate investment property.
Capital Gains Tax
A tax on the profit realized on the sale of a non-inventory asset.
Cash Flow
The net amount of cash and cash equivalents being transferred into and out of a business.
Cash on Cash Return
A rate of return ratio that calculates the total cash earned on the total cash invested in a property.
Closing Costs
Fees paid at the closing of a real estate transaction.
Compound Interest
Interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods.
CPI (Consumer Price Index)
A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
Cryptocurrency
A digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.
Debt Avalanche Method
A debt reduction strategy where you pay off debt in order of highest interest rate to lowest interest rate.
Debt Snowball Method
A debt reduction strategy where you pay off debt in order of smallest balance to largest balance, gaining psychological momentum.
Depreciation
The reduction in the value of an asset over time, due in particular to wear and tear.
Diversification
A risk management strategy that mixes a wide variety of investments within a portfolio.
Dividend
A distribution of a portion of a company's earnings, decided by the board of directors, paid to a class of its shareholders.
DTI (Debt-to-Income Ratio)
The percentage of your gross monthly income that goes to paying your monthly debt payments.
EPS (Earnings Per Share)
A company's net profit divided by the number of common shares it has outstanding.
Equity
The difference between the market value of your home and the amount you owe to the lender.
Escrow
A legal arrangement where a third party holds funds or assets until a specific condition is met.
Estate Tax
A tax levied on the net value of the estate of a deceased person before distribution to the heirs.
ETF (Exchange-Traded Fund)
A type of investment fund and exchange-traded product, i.e., they are traded on stock exchanges.
Executor
An individual appointed to administer the estate of a deceased person.
FICA (Federal Insurance Contributions Act)
A US federal payroll tax.
FIRE (Financial Independence, Retire Early)
A movement dedicated to a program of extreme savings and investment that allows proponents to retire far earlier than traditional budgets and retirement plans would allow.
Forex (Foreign Exchange)
The market where currencies are traded.
Futures Contract
A legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future.
Hedge Fund
A limited partnership of investors that uses high risk methods, such as investing with borrowed money, in hopes of realizing large capital gains.
HELOC (Home Equity Line of Credit)
A loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's equity in their house.
Income Statement
A financial statement that reports a company's financial performance over a specific accounting period.
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.
Interest Capitalization
The addition of unpaid interest to the principal balance of a loan.
IPO (Initial Public Offering)
The process of offering shares of a private corporation to the public in a new stock issuance.
Lifestyle Creep
The phenomenon where discretionary consumption increases on par with an increase in income.
Liquidity
The efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.
LTV (Loan-to-Value Ratio)
A financial term used to express the ratio of a loan to the value of an asset purchased.
Net Proceeds
The amount received by the seller after all costs and expenses are deducted from the gross proceeds.
Net Worth
The value of all assets, minus the total of all liabilities.
NOI (Net Operating Income)
A calculation used to analyze the profitability of income-generating real estate investments.
Opportunity Cost
The potential benefits that an individual, investor, or business misses out on when choosing one alternative over another.
Options
Contracts that grant the holder the right, but not the obligation, to buy or sell an underlying asset at a set price on or before a certain date.
P/E Ratio (Price-to-Earnings)
The ratio for valuing a company that measures its current share price relative to its per-share earnings.
Pay Yourself First
A budgeting strategy where you route a portion of your income to savings or investments immediately upon receiving your paycheck, before paying any bills.
Pension
A fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement.
PITI
An acronym for the four main components of a monthly mortgage payment: Principal, Interest, Taxes, and Insurance.
PMI (Private Mortgage Insurance)
A type of insurance involved in a mortgage that protects the lender if the borrower defaults on the loan. It is usually required if your down payment is less than 20%.
Points (Mortgage Points)
Fees paid directly to the lender at closing in exchange for a reduced interest rate. One point costs 1% of your mortgage amount.
Private Equity
Capital that is not listed on a public exchange.
Probate
The judicial process whereby a will is "proved" in a court of law and accepted as a valid public document that is the true last testament of the deceased.
PSLF (Public Service Loan Forgiveness)
A US government program that forgives the remaining balance on Direct Loans after you have made 120 qualifying monthly payments while working full-time for a qualifying employer.
Purchasing Power
The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy.
Recession
A business cycle contraction when there is a general decline in economic activity.
RMD (Required Minimum Distribution)
The minimum amount you must withdraw from your retirement accounts each year once you reach a certain age (currently 73).
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.
Roth IRA
An individual retirement account that offers tax-free growth and tax-free withdrawals in retirement.
Rule of 72
A simple way to determine how long an investment will take to double given a fixed annual rate of interest.
Safe Withdrawal Rate (4% Rule)
The percentage of your portfolio you can withdraw annually in retirement without running out of money for at least 30 years.
Self-Employment Tax
A tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves.
Social Security
A US federal program of social insurance and benefits.
Stock
A type of security that signifies proportionate ownership in the issuing corporation.
Sunk Costs
Money that has already been incurred and cannot be recovered.
W-2 Form
The form that an employer must send to an employee and the IRS at the end of the year.
Will (Last Will and Testament)
A legal document that expresses a person's wishes as to how their property is to be distributed after their death.
Withholding Tax
Income tax withheld from an employee's wages and paid directly to the government by the employer.