Common Financial Terminology Explained
It’s hard to communicate if you don’t understand the language being spoken. Sometimes, you don’t have to be in a foreign country to feel unsure of what others are saying. For certain people, the jargon and terms used in the financial world can feel as dense and impenetrable as a language they’ve never spoken before.
This unfamiliarity and lack of understanding can have important consequences, deterring people from investing or managing their money in the most beneficial and appropriate way.
If you’re one of the countless Canadians who occasionally (or always) feels in the dark when those-in-the-know use financial terminology, here’s an easy-to-read explainer of some of the most common terms, phrases, and acronyms.
Asset – Whether it’s owned by an individual or an organization, an asset is any kind of possession with economic value. It could be a property, a vehicle, or some kind of specialized equipment. Investments, such as stocks and bonds, are also known as assets.
Bear market – If the stock market endures a period of prolonged decline (the value of stocks and investments goes down by 20 percent or more), it’s known as a bear market.
Beneficiary – A beneficiary is the person who receives benefits from someone else’s financial assets, such as insurance or a pension.
Bonds – A bond is an investment that pays interest to the investor, who agrees to lend money to the bond issuer for a fixed period and for a fixed rate of interest. Governments and corporations both issue bonds. When the bond reaches its maturity date, the issuer pays back the original amount invested plus the interest earned.
Bull market – The opposite of a bear market. When prices are rising and investors are feeling optimistic, the market is rushing forward with the energy of a charging bull.
Capital gain/loss – If you own an asset, such as stocks or property, and you sell it for a price higher than the one you paid, you’ve realized a capital gain. If you sell for a lower price than you paid, it’s a capital loss.
Compound interest, or compounding – Compounding is the repeated addition of interest payments on top of an original investment amount, known as the principal. It’s a great way to grow an investment, because you earn increasing amounts in interest payments as time passes and your initial investment gets bigger and bigger.
Credit score – Lenders assign borrowers a credit score that indicates how trustworthy and reliable that person is. The less debt you have and the better you’ve been at paying off debt, the higher your credit score will be. If you have a good credit score, lenders will be more likely to offer favourable borrowing terms such as lower interest rates, making it cheaper to borrow money.
Debt – If you owe money on your credit card, a mortgage, or another loan, then you have a debt. Most debts come with interest charges, meaning you must make regular payments to keep the debt from growing larger.
Equities – This is another word for stocks. If you own equity in something, it means you have some sort of ownership stake in it through your investment. You can hold equity in a property you’re paying off, a vehicle, or a business.
ETF – This acronym refers to an Exchange-Traded Fund. Typically, the fund includes a basket of different investments, sometimes grouped by a theme (i.e., currencies or energy). Unlike mutual funds, ETFs can be bought and sold on the stock market.
GIC – This one stands for Guaranteed Investment Certificate. GICs are a low-risk investment where you lend money to a financial institution for a predetermined amount of time, and for a set interest rate. While you can’t lose money on a GIC, interest rates tend to be lower than other, riskier investments.
HELOC – This acronym refers to a Home Equity Line of Credit. If you own a home, you can borrow against your equity in the property and access a line of credit.
Inflation – Most shoppers know all about this term, which refers to rising cost of items over time. If inflation rises above the interest rate you earn on savings and investments, you’re losing purchasing power, meaning your money won’t go as far as it used to.
Line of credit – A line of credit is a way to access money when you need it. A financial institution can set you up with revolving access to a fixed amount, say $10,000. You can withdraw as much of that amount as you wish, and you only pay interest on the amount withdrawn. Put a stop to interest charges by paying back what you removed.
Liabilities – The opposite of assets, liabilities are things we owe to others. This could include loan debt to a bank or an income tax bill.
Liquidity – This one has nothing to do with water. In finance, liquidity is the term used to describe how easily an asset can be converted into cash. A mutual fund is fast and easy to sell, making it a liquid asset. Conversely, a property generally takes a long time to be sold, making it illiquid.
Mutual fund – A mutual fund is a pooled investment product that contains a basket of different assets. Mutual funds offer the opportunity to invest in stocks and bonds without having to choose individual assets. Instead, a fund manager chooses what to hold inside the fund.
Overdraft – An overdraft is a loan provided by your financial institution to cover bills and charges after the account balance hits zero. Unless you’re paying for overdraft protection, you’ll likely be charged for leaving your balance in negative territory.
Prime rate – The prime rate is an institution’s base interest rate for lending money. Most borrowers pay a premium above the prime rate when they take out a mortgage or loan.
Registered account – Canadians can access various tax benefits and grants through savings accounts that are registered with the federal government. These include Registered Retirement Savings Accounts (RRSPs), Registered Education Savings Plans (RESPs), and Tax-Free Savings Accounts (TFSAs).
Securities – Securities are tradeable investments, typically stocks and bonds. Not all assets are securities, but all securities are assets.
Tax credits – Tax credits come in two kinds, refundable and non-refundable. A refundable tax credit pays you a refund if you don’t owe any tax. A non-refundable credit can reduce the amount of tax you have to pay but won’t pay you a refund.
Tax deductions – Deductions are expenses that lower your amount of taxable income. If you earned $50,000 in salary but have $10,000 in tax deductions, you don’t have to pay income tax on the deductible amount. RRSP contributions are tax-deductible, adding an immediate benefit to a long-term savings plan.
