Understanding Key English Finance Terms

The world of finance uses specific terminology, often derived from English, which can be confusing if you're not familiar with it. This guide clarifies some essential English finance terms.

Equity & Shares

Equity refers to ownership in a company. It represents the value of the company available to shareholders after all debts have been paid. This can be expressed as shares (also known as stocks), which are units of ownership in a corporation. Owning shares makes you a shareholder, entitled to a portion of the company's profits and assets.

Bonds

A bond is a debt security, essentially a loan made by an investor to a borrower (typically a corporation or government). In return for the loan, the issuer promises to pay the investor a specified interest rate (the coupon) over a set period and to repay the principal amount (the face value) at maturity.

Derivatives

Derivatives are financial contracts whose value is derived from an underlying asset, such as a stock, bond, commodity, or currency. Common types include futures, options, and swaps. Derivatives are often used for hedging risk or for speculation.

Hedge Fund

A hedge fund is a privately managed investment fund that uses sophisticated investment strategies, such as short-selling and leverage, to generate higher returns. Hedge funds typically cater to wealthy individuals and institutions.

Inflation & Interest Rates

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Interest rates are the cost of borrowing money, usually expressed as an annual percentage. Central banks often use interest rates to control inflation.

Yield

Yield is the return on an investment, usually expressed as an annual percentage. For bonds, it's the return an investor receives based on the bond's current market price. For stocks, it often refers to the dividend yield, which is the annual dividend payment divided by the stock price.

Liquidity

Liquidity refers to how easily an asset can be converted into cash without significantly affecting its market price. Cash is the most liquid asset, while real estate, for example, is less liquid.

Volatility

Volatility measures the degree of variation in the price of an asset over time. High volatility indicates that the price can change dramatically and rapidly, while low volatility indicates more stable prices. It's often associated with risk.

Due Diligence

Due diligence is the process of thorough investigation and analysis performed before entering into a transaction or agreement. It's a crucial step in financial decision-making to assess risks and opportunities.

Understanding these terms is essential for navigating the financial landscape. Further research and professional advice are always recommended when making financial decisions.