26 Essential Financial Terms Explained Simply: A Quick Guide to Key Concepts

Understanding financial terminology is crucial for making informed decisions in both personal and professional finance. Here’s a straightforward explanation of 26 essential financial terms:

Balance Sheets: These financial statements summarize a company's debts and assets using the equation: Assets = Liabilities + Equity.
Liquidity: Refers to how quickly an asset can be converted into cash. Cash is the most liquid, followed by stocks, while real estate is the least liquid.
GAAP: Generally Accepted Accounting Principles are the rules for financial reporting, ensuring consistency in how companies report their finances.
Capital Gains: The profit from the sale of an asset above its purchase price. Gains can be realized (when the asset is sold) or unrealized (when the asset is still held).
Net Income: The total revenue minus expenses, indicating a company’s profitability.
Equity: The value of ownership in an asset or company after subtracting debts. Negative equity occurs when liabilities exceed the asset’s value.
Depreciation: The decrease in value of a physical asset over time, excluding real estate, which typically appreciates.
EPS (Earnings Per Share): A measure of a company’s profitability calculated as net income minus dividends divided by the number of shares outstanding.
Net Worth: The total value of what you own minus what you owe.
Amortization: The gradual accounting of an intangible asset, such as patents or trademarks, over time.
Capital Markets: Platforms where financial assets like stocks and bonds are traded among buyers and sellers.
Profit Margin: Net income divided by revenue, indicating how efficiently a company can generate profit.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization, showing a company's cash flow.
FICO Score: A credit score ranging from 300 to 850, based on payment history, credit length, and amount owed.
Stock Options: The right to purchase a company’s stock at a set price, often granted to employees.
Bonds: Loans from investors to issuers, including government bonds, with returns paid over time.
Stocks: Shares of a company’s ownership, valued based on earnings potential and other factors.
Cash and Cash Equivalents: Assets easily converted to cash, including cash itself and highly liquid investments.
Income Statement: A financial report summarizing income and expenses over a specific period, also known as a profit and loss statement.
ROI (Return on Investment): A ratio showing the profitability of an investment, calculated as (Income - Cost) / Cost × 100.
Cash Flow: The net amount of cash moving in and out of a company, categorized into operating, investing, and financing activities.
Compound Interest: Interest on interest, which grows over time as previous interest earnings accumulate.
Valuation: The determination of an asset's or company's worth using various financial metrics.
Liabilities: Debts or obligations owed, including wages and supplier payments.
Working Capital: The difference between assets and liabilities, indicating cash available for daily operations.
Term Life Insurance: An insurance policy providing coverage for a specified period, with no value if the policyholder survives the term.