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Financial Literacy

Updated: Aug 22, 2021

Financial literacy is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.

Its more important than ever before to come financially literate. There are more opportunities to participate in markets and investment vehicles than there has ever been. However, with the immergence of assessible investment opportunities, there are also an uptick in schemes to take advantage of the uneducated.

Below are 21 terms to become familiar with when starting your investment journey whether you have 1 dollar or 1 million dollars:

Compounding Interest - Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.

Dividend - A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a proportion of the profit as a dividend to shareholders.

Fractional Shares - A fractional share is a portion of an equity stock that is less than one full share.

Return on Investment - Return on investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost.

Stock - A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company's earnings, proceeds from liquidation of assets (after discharge of all senior claims such as secured and unsecured debt), or voting power, often dividing these up in proportion to the amount of money each stockholder has invested.

Bonds - A bond is a fixed income instrument that represents a loan made by an investor to a borrower. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.

Shareholder - A shareholder (also known as stockholder) is an individual or institution (including a corporation) that legally owns one or more shares of the share capital of a public or private corporation.

Sell Side - Sell-side refers to the part of the financial industry that is involved in the creation, promotion, and sale of stocks, bonds, foreign exchange, and other financial instruments. Sell-side individuals and firms work to create and service products that are made available to the buy-side of the financial industry.

Buy Side - Buy-side refers to the investors or firms who advise the investors or institutional buyers for buying the securities and investments like private equity funds, mutual funds, life insurance companies, unit trusts, hedge funds, and the pension funds for them or for their clients as buying side constitutes half of the market.

FICO Credit Score - FICO scores range from 300 to 850, with 850 considered a perfect score. The higher your score, the better your odds of being approved for loans and lines of credit at the most favorable interest rates.

Net Worth - Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities.

Liability - In general, a liability is an obligation between one party and another not yet completed or paid for.

Income - For households and individuals, "income is the sum of all the wages, salaries, profits, interest payments, rents, and other forms of earnings received in a given period of time.

Depreciation - a reduction in the value of an asset with the passage of time, due in particular to wear and tear.

Asset - property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.

Cash Flow - Cash flows refer to the movements of money into and out of a business, typically categorized as cash flows from operations, investing, and financing.

Investment - A thing that is worth buying because it may be profitable or useful in the future.

Annual Percentage Rate (APR) - An annual percentage rate (APR) is the annual rate charged for borrowing or earned through an investment.

Dollar Cost Averaging - an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset's price and at regular intervals.

Fixed Income - Fixed income broadly refers to those types of investment security that pay investors fixed interest or dividend payments until its maturity date. At maturity, investors are repaid the principal amount they had invested. Government and corporate bonds are the most common types of fixed-income products.

Federal Housing Administration (FHA) - The FHA insures mortgages made by private lenders for single family properties, multifamily rental properties, hospitals, and residential care facilities. The goal of the organization is to facilitate access to affordable mortgage credit for low- and moderate-income and first-time homebuyers, for the construction of affordable and market rate rental properties, and for hospitals and residential care facilities in communities across the United States and its territories.

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