Financial Glossary
Definitions of common financial terms to improve your financial literacy.
Principal
The initial amount of money borrowed in a loan or the original amount of money invested, excluding any interest or returns.
Interest Rate
The percentage of the principal charged by a lender for the use of its money. For investments, it is the percentage of the principal earned over a certain period.
Loan Term
The period of time over which a loan is scheduled to be repaid. Common loan terms are for several years for cars or up to 30 years for mortgages.
Amortization
The process of paying off a debt over time in regular installments. An amortization schedule is a table detailing each periodic payment on a loan.
Down Payment
An initial, upfront partial payment for the purchase of an expensive item like a house or a car. It is usually a percentage of the total purchase price.
Trade-in Value
The amount of money a dealership gives you for your old car when you buy a new one. This amount is deducted from the price of the new car.
Compound Interest
Interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods. It's often called "interest on interest."
Fixed Deposit
A financial instrument provided by banks which provides investors a higher rate of interest than a regular savings account, until the given maturity date.
Maturity Amount
The total amount paid to an investor at the end of a fixed deposit or investment term, including the principal and the interest earned.
Future Value (FV)
The value of a current asset at a specified date in the future based on an assumed rate of growth.
Return on Investment (ROI)
A performance measure used to evaluate the efficiency or profitability of an investment. It is calculated by dividing the net profit of an investment by its initial cost.
Annual Return
The profit or loss on an investment over a one-year period, expressed as a percentage of the initial investment cost.
Inflation
The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power of currency is falling.
Purchasing Power
The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy.
Revenue
The total amount of income generated by the sale of goods or services related to the company's primary operations.
Cost of Goods Sold (COGS)
The direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good.
Gross Profit
The profit a company makes after deducting the costs associated with making and selling its products. It is calculated as Revenue - COGS.
Operating Expenses
The costs a business incurs through its normal business operations, not directly related to production (e.g., rent, marketing, salaries).
Net Profit
The amount of profit left after all expenses (including taxes and interest) have been deducted from revenue. It's the "bottom line."
Profit Margin
A ratio of profitability calculated as net income divided by revenue. It measures how much out of every dollar of sales a company actually keeps in earnings.
Net Savings
The amount of money left over after subtracting total expenses from total income. It can be positive (surplus) or negative (deficit).
Fixed Costs
Business expenses that are not dependent on the level of goods or services produced by the business. Examples include rent, salaries, and insurance.
Variable Costs
Costs that change in proportion to the production output. Examples include raw materials, packaging, and direct labor.
Break-Even Point
The point at which total cost and total revenue are equal, meaning there is no net loss or gain. The business is "breaking even."
Debt Consolidation
The process of taking out a new loan to pay off a number of other debts. This is often done to get a lower interest rate, a single monthly payment, or both.
Annual Percentage Rate (APR)
The annual rate of interest charged to borrowers and paid to investors. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan.
Annual Percentage Yield (APY)
The effective annual rate of return taking into account the effect of compounding interest. APY is the rate an investment earns in a year.