CFO of Life #47: - Finance Jargon - The top 50 words you need to know to start speaking "Finance"

Do you speak finance?

Most people don't, and that pushes many away from engaging in any investing activities. The scary part is that no school teaches us how to pay taxes, how to read a balance sheet or what inflation is. Also, knowing about inflation is a lot more valuable for the majority of people than knowing the different types of soil and their pH.

If that was not a good enough reason to convince you why you should learn to “speak finance”, let me give you a few more examples:

Understanding how mortgages work is vital as for most of us, our house will be the biggest purchase of our lives. Now if you simply take it for granted that it’s going to be $200k over 30 years on a 5% interest rate, there’s nothing wrong. But if you learn the language of finance and how things work, you will notice the close relationship between your principal, your monthly repayment and the total length of the loan. Or how, if you pay slightly more each month, you will be able to close the mortgage sooner and save a lot of money.

And this ties in nicely with the next reason why you need to understand finance, so you can make the best decision at your next salary negotiations. Many times, people (me included) would ask for a higher salary when negotiating a new position, but that’s not always the best thing. Because you can easily get taxed 30% on it, or not get it at all, just because they offered you the maximum possible.

On the other hand, you can sometimes ask for stocks (if the company offers it). Not only that they will be taxed at a different level, but they would hopefully grow in parallel with your salary and you would have a further benefit from them.

At the same time, knowing how your tax system works is really important and will help you a lot. For example, in a lot of countries, the Captial gains tax is 20%, but your income tax would easily spiral out of control in the 30-40% or more. If you understand how taxes intertwine with your investment and how they work for you in the long term, then you can understand when it’s better to choose to increase your income and when asking for equity is more feasible.

That’s why it’s essential to at least be learning to "speak finance", as you would otherwise never think about all those small nuances. And those small nuances add up over time to a lot more than you expect. They can be the difference between a good life and a great life. That’s why it’s vital to understand finance and you will see how much it impacts your life.

So let's start slowly learning everything with a short explanation of the 50 most important things to know about finance. Starting with "What is investing?" and what are the most important terms around it.

?Category 1: Investing

1. Investing is the act of taking your money and buying assets with the anticipation of them increasing in price

2. Trading: The act of buying and selling assets with the aim of profiting from short-term price changes

3. Profit s the money made from investing after paying all fees and taxes

4. Loss is the money lost by investing after paying all fees and taxes

5. Return is the profit or loss of an investment but represented in a percentage of the original investment

6. Capital gains tax is the tax on any profit made from the sale of an asset

7. Short-term is a time period usually referring to less than a year

8. Long-term is a time period usually referring to more than five years

9. Unrealized profits (paper gains) is the potential profit from the sale of an asset that has not yet been sold

10. Realised Profits (Crystalised profits) are profits that have actually been made from the sale of an asset

Now, know what investing is and what the 10 most important finance jargon words are, it’s time to understand what you actually would be investing in. And all of that is covered in:

Category 2: Assets

11. Asset is anything tangible that you can own as real estate or something intangible as intellectual property

12. Liability is all the debts that a business owes to its creditors

13. Stock or a share is a part ownership of a company and it entitles you to a share of its profits and dividends

14. Bond is a type of security where the company or government issuing it owes the creditor and is obliged depending on the terms to provide cash flow

15. Commodity can be physical (such as oil or gold) or financial commodity (such as a futures contract)

16. Real estate refers to any property and can be residential real estate (used for housing) or commercial real estate (used for businesses).

17. Cash is any currency that you own regardless of it is in physical cash or in a bank deposit

18. FX Rate is the foreign exchange rate or the rate of exchange between two currencies ie. how many Americans Dollars you get for one Great British Pound

19. Private Equity is a fund which invests in private companies regardless of what stage they are in

20. Venture Capital is a subset of private equity that invests in early-stage private companies

Now you probably start to see how all of these tie in together. How one jargon word is used to describe the next and brings more and more depth of detail to the conversation. But a lot of things would not make sense without?

Category 3: Economics?

21. Economy is the system by which goods and services are produced, sold and bought in a country or region

22. Microeconomics is the study of how individual households and businesses make decisions on any market activities ie. the individual level economics

23. Macroeconomics is the study of the economy as a whole, regardless if just one country or global economy ie. the global level

24. Institution or institutional investors are firms that specialize in managing money on behalf of their clients

25. Interest is how much you are paid for lending your deposits or how much you pay for borrowing money

26. Inflation is the percentage at which prices are increasing, measured between two points in time

27. Deflation is the opposite of inflation or the percentage rate at which prices are decreasing, measured between two points in time

28. Regulator is the government entity that ensures that all financial activities are following the laws

29. Money supply is the total amount of money in circulation in an economy

30. Monetary Policy are the actions taken by a central bank to influence the money supply and interest rates in an economy

But before we continue learning the language of finance, it is worth reminding you that the best investment you can make is in yourself, and especially in your education. And one of the best things to learn is programming.

Regardless of what language you choose, it is hands down the best thing as you will not only learn how apps are created or how to correctly wrangle data, you will learn how to make your job easier and future-proof your career. I know, there is a vast landscape of platforms that offer courses on this topic, but Hyperskill stands out as a beacon of excellence in the realm of coding education.?

They offer hands down the best project base education that will help you not only learn but build a project that can single-handedly help you land your next job. As you would be able to show how from day one you can provide value for your future employer. But not only that, you will gain a myriad of skills that will help you future-proof your career.

Building on that, now that we have an understanding of what investing is, the type of assets you can invest in and a brief introduction to ECONOMICS 101, we should dive into Category 4: Portfolio.?

31. Portfolio is a basket of assets that are held in one account regarding if it is held by an individual or an institution

32. Diversification is the practice of investing in different assets to reduce your risk

33. Asset Allocation is the process of dividing your investment portfolio between different asset classes

34. Alpha is a measure of how well your investment performed relative to your benchmark

35. Beta is the measurement of how volatile your investment is relative to the overall market

36. Rebalancing is the process of adjusting the asset allocation of a portfolio to maintain our investment goals

37. Concentration is the degree to which your portfolio is invested in a single asset class, sector or individual security

38. Benchmark is a standard against which the performance of your investment is measured, that is usually the most relevant index to your investment

39. Market Risk is the risk of how much your asset will go up or down compared to the overall market

40. Risk tolerance is the amount of risk that you as an investor are willing to take on

Finally, let's finish by looking at some additional financial jargon that is useful to know.

Category 5: Other

41. Income statement is a financial statement which summarizes the revenues and expenses of a company over a period of time which is usually a year

42. Cash flow statement is a financial statement that summarizes the cash inflows and outflows of a company over a period of time, which is usually a year

43. Balance sheet is a financial statement that summarizes the assets, liabilities and equity of a company at a point in time, which is usually a year

44. Depreciation is the gradual decrease in the value of an asset over time

45. Amortisation is the gradual decrease in the value of an intangible asset over time

46. EBITDA or Earnings before interest, taxes, depreciation and amortization is a measure of a company's profitability that excludes some specific expenses

47. EBIT or Earnings before interest and taxes is a measure of a company's profitability that excludes some specific experience

48. Liquidity is the ability to buy and sell an investment quickly and easily, it is an extremely important factor when considering any investment

49. Opex or Operating expenses are the expenses that a company incurs in its day-to-day operations

50. Capex or Capital expenditures are the expenses that a company incurs in acquiring or upgrading its assets

While this doesn't cover everything that you would need to become “fluent in finance", you are now on the right path to get there. It will take time, a bit of patience and curiosity, but learning the language of finance will pay you dividends in the long run.

Next week we would put all that into good use by exploring how one of the easiest investing strategies “Dollar Coast Averaging” works.

Thank you for reading! All comments and topic suggestions are highly appreciated. Post #47 in the series CFO of Life

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