Financial Terms Decoded


By Megan Segura – October 31, 2011

Learning the Language of Finance

This past year, I have become much better acquainted with the ins and outs of my own personal finances, and in the process,  my vocabulary has also expanded greatly!  Terms that once left me puzzled are easier to comprehend, which really helps when big money decisions and stacks of agreements are waiting to be tackled.  And since the definitions themselves can be somewhat mind-numbing if you are not in the know, we’ve decided to do a Fab & Fru breakdown of some common terms to help YOU savvy up when it comes to financial speak!

Equity

Equity is the value of an ownership interest, including shareholders’ equity in a business.

Which means:  The term “equity” can be a bit confusing because it refers to a few different things.  So let’s break it down – the stock market is also called the “Equity Market,” because stock ownership represents the portion you own in a company.  Okay, not so daunting, right?  So what else is there…..

You probably hear the term “home equity” thrown around – all that refers to is the difference between the the unpaid mortgage balance from the fair market value of the home.  The more “equity” you have in your home, the higher percentage of it you actually own.

A Financial Portfolio

Sounds pretty fancy, right?  But chances are you might already have one and not even realize it!  A financial portfolio is just your collection of financial assets – things like stocks, bonds and cash. You might manage your own portfolio, or you might hire someone to manage it for you as your wealth grows.  Portfolios may be held by individual investors and/or managed by financial professionals.

Mutual Funds

A Mutual Fund is a professionally managed and invested pool of money.  This money comes from lots of people who buy into the fund.  The money pooled from all the individuals is used to buy things like stocks, bonds and other securities, depending on the type of mutual fund it is.

Because mutual funds buy lots of different securities, they are seen as a way to diversify and spread out the risk that is associated with putting money in just one company.  An example would be instead of putting money in one specific tech stock, you might instead invest in a Tech Mutual Fund, which would spread your money over several different tech companies, thereby lowering your risk.

Fiduciary Duty

Fiduciary Duty is an important concept to understand.  Basically, it’s a legal and ethical relationship of trust between two or more parties. Common examples would be when a child is making money or an elderly person can no longer be responsible for their own finances.  In both situations, a fiduciary would be appointed to oversee the finances.  They key is that  a fiduciary does not make decisions for their own gain or profit!   Rather, all decisions must be made with the benefit to the client in mind.   Not surprisingly, often the role of fiduciaries is challenged in court – anyone recall the massive scandal surrounding billionaire Brooke Astor and her fiduciary son?

What financial terms leave you confused?

Here are some other articles you might find interesting:

Get Stock Market Savvy

What the Heck is the IMF?

Get Schooled in Personal Finance

Understanding Interest

 

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One Response to “Financial Terms Decoded”

  1. Louie says:

    I’d also like you to expand this section by giving the definition of an
    “Net Worth Statement”, which is a great summary key tying in all aspects of your articles definitions, personal finances and explanations together. Also, “What is a Bond and Preferred Stock? What about equities paying dividends? Reinvestment of dividends or taking cash.
    This initial article would be a great segway to more in depth knowledge and explanations.

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