"C" Money Terms: From Cash to Crypto through Compounding

The third instalment of the A to Z of Money Terms and Financial Jargon that we're working on for The Money Awareness and Inclusion Awards is so big that it couldn't go in a post, or even in the comments of the post as we had done before. So it's here in an article instead.

As before, the aim is to keep the opening for each definition as simple as possible, to explain the term in the most easily understood words, before adding a little more detail, context, plus an example that hopefully illustrates the idea.

Where unsure, I've tried to err on the side of being too simple rather than too complicated, although hopefully without losing any important accuracy.

That doesn't mean we won't welcome comments or suggestions. Fire away!

C is for Cash

#Cash is money in the physical form of bills or coins.

An example? A practical example of cash would be if going to a store and paying for a purchase with a $20 bill instead of a credit card.

More detail? Cash is a physical representation of currency and is the most liquid form of assets. This means that it can be easily converted into other forms of assets, such as goods or services, and can be easily exchanged for other currencies.

Last note? Cash and equivalents is an accounting item which also includes bank deposits and marketable debt securities that can be liquidated immediately.

Or Cashless economy?

A #cashless economy is one where people rely increasingly on electronic forms of payment, such as credit and debit cards, rather than cash.

An example? If everyone in a country paid at the store with a credit card or e-wallet, rather than physical notes and coins, then cash would be of less use for transactions.

More details? This can be more convenient, since people don't have to carry around cash or go to the bank to withdraw money, and can also reduce the incidence of physical robbery. It can also make it easier for businesses to track their finances and for governments to collect taxes.

Last note? A cashless economy can also lead to problems, such as when people lose access to their money, or electronic systems become expensive gateways to the financial system excluding small businesses and people on low incomes.

What about Currency?

#Currency is the form of money that is used in a particular country, often printed (or authorised) by its central bank.

An example? The United States uses dollars, while Japan uses yen.

More detail? Most countries have their own currency, although Eurozone members use the Euro, and some smaller emerging economies are "dollarized" and use the US dollar.

Last note? Physical currency can be in the form of paper bills or coins. It can also be in the form of digital currency, which is money that is stored electronically.

As in Currency Crisis

A #CurrencyCrisis is when the value of a currency, when compared to other currencies, suddenly drops.

An example? A real-world example of this is what happened to the Venezuelan bolivar in 2018, or the Indonesian rupiah fell in 1998.

More detail? This can happen when a country's economy is not doing well, or the central bank creates too much money compared to other countries, and people start losing faith in the currency.

Last note? When this happens, people start selling the currency, and this can cause its value to drop even further, and make the crisis even worse.

Currency Board

A #currencyboard is a monetary authority which is responsible for issuing new money and controlling the money supply in a country.

An example? Hong Kong has had a currency board since 1983 and its currency, the Hong Kong dollar, has been stable since then, despite repeated attacks from hedge funds

More details? A currency board pegs the country's currency to a foreign currency, typically the US dollar, helping to stabilize the currency and keep inflation low.

Last note? A currency board does not print money to fund government spending, so the government must generate revenue through taxes or borrowing.

Credit

#Credit is a system allowing people buy things now, with the promise to pay back the money later.

An example? Using a credit card to buy something creates two types of potential credit, a short period of interest-free until receiving the bill, and then extended repayment at much higher interest rates.

More details? Credit is based on trust, and when you borrow money you are expected to pay it back. If you don't pay back the money you borrowed, it will negatively impact your credit score which will make it harder for you to borrow money in the future.

Last note? In accounting, a credit is an entry that records a decrease in assets or an increase in liability as well as a decrease in expenses or an increase in revenue.

Like A Credit Card

A #CreditCard is an account with a credit service provider that gives the cardholder a set amount of credit to spend.

An example? Until recently, credit cards were always literally cards, but these are being replaced by virtual or digital cards. The two most common issuers are Visa and Mastercard, although UnionPay is popular in China.

More detail? The cardholder can use the credit card to make purchases immediately and pay for them over time. This has the benefits of being faster and more efficient, and can also gather rewards from the card issuer, such as air miles.

Last note? An initial interest free credit period, until receiving the bill, is followed by a period on which high interest rates are paid. Depending on the country, this can be between 24% and 36% per year, which means purchases will cost double within two to three years. In addition, the ease of using credit cards can make it very easy to spend more than intended.

Capital

#Capital is the monetary value of the assets invested in a company or enterprise.

An example? A new business requires start-up capital, the money needed to buy the things it needs to conduct operations, such as premises, salaries, a factory or licenses.

More details? "Capital" can also be used to describe the funds available to a business to grow, expand, and create assets, both tangible and intangible.

Last note? If a company needs to operate at a loss for a period of time, be it to grow more quickly or survive a seasonally weak period, capital can provide that funding. Without it, the business may fail and collapse.

Capital Markets

#CapitalMarkets are markets for securities, where companies and governments can raise long-term funds, in the form of stocks (equity), bonds, and other financial instruments.

An example? The New York Stock Exchange and the Nasdaq are examples of capital markets, but there are similar markets all over the world.

More details? The securities issued are sold in both the primary market, when first issued and the issuer receives the capital, and then in the secondary market, where investors sell to other investors.

Last note? Most transactions are secondary, between investors, as the seek to earn returns on their investments.

Compounding

#Compounding is when an investment makes gains, and then the gains themselves earn further gains.

An example? If you invest $1,000 for 10% return, after one year your total investment will be worth $1,100. The next year, you will earn 10% on the new total of $1,100, which is $110. So now your investment is worth $1,210.

More details? As you can see, each year your investment grows a little bit more because you are earning interest not only on your original investment but also the additional gain.

Last note? Compounding starts slowly but becomes more obvious over time. The Rule of 72 is an illustration of how this works, as 1% doubles (100% return) in 72 years, not 100.

Crisis (Financial)

A #financialcrisis is a situation in which one or multiple capital markets fall significantly, leading to spillover effects in the real economy.

An example? In the Global Financial Crisis, a collapse in valuations in the sub-prime debt market spread to other markets as the values of those assets held in banks and other financial institutions were marked down.

More details? A financial crisis can be associated with a broad panic during which investors sell off assets, or a bank run when depositors withdraw money from accounts in fear that the bank will not be able to re-pay them.

Last note? Financial crises are hard to predict or prevent, but the most common cause is over-valued markets (the popping of an asset bubble). Governments often "bail out" financial institutions in a financial crisis, to prevent the effects spreading further to recession or inflation, but this can lead to a moral hazard that encourages greater risk-taking in those institutions.

Cost of Living Crisis

A #CostOfLivingCrisis is when the cost of basic necessities like housing, food, and healthcare become too expensive for people to afford.

An example? When an increasing percentage of society can no longer afford to pay their rent or buy food because the prices have become too expensive.

More details? A cost of living crisis can have many different causes, like economic recession or inflation, or a combination of both.

Last note? Cost of living crises can also be localised in specific areas, when the cost of rent becomes so high that many people can no longer afford to live there.

What's a Credit Score?

A #CreditScore is a calculated number that represents your creditworthiness.

An example? If you have a high credit score, you're more likely to be approved for a loan with a lower interest rate. A low credit score may mean higher interest rates, or no loan approval at all.

More details? The US scoring system take into account the length and nature of your credit history, the amount you owe and how that is constituted.

Last note? Other countries, such as Japan, without a formal rating system, rely on the customer's direct relationship with the bank and their credit history there.

Central Bank

A #CentralBank is a financial institution that oversees the monetary system for a nation (or group of nations).

An example? The Federal Reserve System is the central bank of the United States.

More details? The central bank is responsible for issuing currency, regulating banks, and providing financial services to the government. The extent to which it is "government-run" is debatable, and varies around the world, but it is held as ideal for the bank to be independent.

Last note? The central bank is sometimes referred to as "the lender of last resort" because it can provide financial assistance to banks and other financial institutions in times of need.

Capital Gains

#Capitalgains are profits from the sale of an asset.

An example? Let's say you bought a stock for $100 and sold it later for $150. Your capital gains would be $50.

More details? The asset could be a stock, a bond, a piece of real estate, or something else, as defined by the relevant jurisdiction (the owner's tax residency or the asset's location).

Last note? Some countries tax capital gains, while others do not. The way in which the tax is administered can lead to multiple different ways of holding or trading the asset for reasons of tax efficiency.

Capital Controls

#Capitalcontrols are government policies that restrict the flow of money in and out of a country, to help strengthen their financial and fiscal policy control over the country's economy and currency.

An example? Governments sometimes place a limit on the amount of money that citizens are allowed to take out of the country.

More details? Capital controls are often put in place during times of economic or financial crisis, in order to prevent a country's currency from collapsing.

Last note? In an era of global digital transactions and cryptocurrencies, capital controls have become even harder to police, although global accounting agreements and anti-money laundering regulations have made tracking movements more transparent.

Collateral

#Collateral is an asset used to guarantee a loan.

An example? A mortgage is collateralised by the house you buy: if you default on the loan, the lender owns your house.

More details? Collateralised loans are generally safer for banks, as customers are more likely to repay if they stand to lose the asset they bought, and so often attract lower interest rates.

Last note? Banks generally do not want to seize assets, however, as they are not experienced property managers, and so will often help customers work to re-finance their repayments.

Last but not least, Cryptocurrency

#Cryptocurrency is a digital asset designed to work as a medium of exchange, like currencies.

An example? #Bitcoin, the first and best-known cryptocurrency, was created in 2009. It requires proof-of-work via an increasingly complicated algorithm to limit creation of new coins, the number of which is limited to 21 million.

More details? Cryptocurrencies use cryptography to secure transactions, to control the creation of additional units, and to verify the transfer of assets. This process is decentralized, which puts them outside government or financial institution control.

Last note? As with other assets, the value of a cryptocurrency is determined by the market supply and demand for that particular coin.?