5 Financial Terms You Need To Know
If you’re not from a financial background, getting familiar with common financial terms should be a priority for you, especially if you’re looking to work in finance or make some big financial decisions. The more informed you are, the better you’ll understand financial things and you’ll feel more clear with the decisions you’ll make. It can be a bit overwhelming learning all the financial terms if you’re just getting started, so I’ve made a summary of the top 5 financial terms to help you get started understanding financial terms. Keep reading to learn more.
1. Market Volatility
Market Volatility is something you’re probably going to be hearing a lot about in the coming months as the financial effects of the pandemic continue to trickle down to the consumer. Volatility is an investment term that describes when the market experiences extremely unpredictable and dramatic price changes. This is something that can happen in both directions – when prices increase or decrease suddenly. There are a lot of things that can influence market volatility, but some of the most common factors include inflation, changes in interest rates and global events such as the pandemic.
At the moment the entire world is experiencing really high rates of inflation, due to a number of reasons including supply issues caused by the pandemic. Inflation is the decline in purchasing power of a currency over the course of time. That means $1 today will have less purchasing power in 5 years time. Each year there is an inflation rate that reflects how fast the purchasing power is declining. At the time of writing the inflation rate in the United States is somewhere between 6-8% and is at a 30 year high. This affects consumers directly as it quite simply costs more to buy the same things.
3. Net Worth
I’m sure you’ve heard the concept of ‘net worth’ before, but do you really understand it? It’s the total sum of all your assets, minus your liabilities. Say for example you own a home that’s worth $200,000, but you have a $100,000 mortgage on your property, then your net worth would be $100,000. You add up all your assets such as properties, investments, savings, vehicles and then subtract your liabilities in order to come up with your total net worth
This is a really important part of income and investments, because often we have a lot of net worth but it’s tied up in things that aren’t very ‘liquid.’ The term liquidity refers to investments that you have that you can easily turn into accessible cash without losing the value of the assets. Having an asset that’s considered high liquidity means that you can easily sell it without compromising its value – that it’s something that is always in high demand and easy to sell. The most liquid assets are cash and currency, but stocks, bonds and crypto are also high liquidity.
5. Risk Tolerance
This is an important thing to understand if you’re looking to invest and it is closely tied into the type of investments you’re prepared to enter into. If you’re young, with a large disposable income, no real dependents or large expenses then you can be much more risky than someone who is closer to retirement age and needs to be almost certain their money will be safe. Your personal risk tolerance will depend on your investing experience, your age and life situation as well as how long you want to invest. Learning more about your risk tolerance can help quickly identify what kind of investments you’re interested in.
Becoming experienced with financial terms can help you have more confidence and can help guide you in your financial journey.