Learning new terms that can help us improve our knowledge about financials is essential as young professionals. It’s important for us to learn and understand what these financial terms mean and how they affect us and our family. I was reading an article written by Forbes “A Hand Up or A Handout? Tackling America’s Financial Literacy Crisis”. In that article there were two paragraphs that stood out to me. The first was “Household debt continues to rise, growing by $3.5 billion dollars in just the third quarter of 2021.” Considering all of this, it’s no surprise that just four in seven Americans can be categorized as ‘financially literate,’ and only 24 percent of millennials understand basic financial concepts.” The second paragraph that stood out to me was “So how did one of the world’s most affluent nations get here?”
Tanya Van Court, the founder and CEO of the goal-based savings app Goalsetter, recently told me that, for most of us, the problem starts at an early age and continues through adulthood. “Parents can’t teach what they were never taught,” she says. “That means we have generation after generation just trying to get by. Children who are financially uneducated become adults who are financially uneducated, and on and on we go.” This is a big problem for our generation and why its important for us to learn different terms and familiarize ourselves with those terms. Having a basic understanding of financial terms can help us on our journey to gain financial independence. Here is part two of financial terms young professionals should know!
1. Dividend
A dividend is a distribution of profits by a corporation to its shareholders. Shareholders are typically paid dividends in cash, but they may also be paid in stock or other assets. Dividends are usually declared and paid on a quarterly basis, but they can also be paid annually or more frequently.
What are some examples of dividends?
- Dividends from stocks or mutual funds
- Dividends from bonds
- Dividends from real estate investment trusts (REITs)
- Dividends from annuities
- Dividends from certain life insurance policies
- Interest from savings accounts or certificates of deposit (CDs)
- Capital gains from the sale of investments
Dividends are one way that companies return value to shareholders. They are typically paid out of a company’s earnings, but they can also be paid from other sources, such as cash reserves. Dividends are usually taxable, but there are some exceptions. They are typically paid in cash, but they may also be paid in stock or other assets. Dividends are usually declared and paid on a quarterly basis, but they can also be paid annually or more frequently.
2. Portfolio
A portfolio is a collection of investments, which can include stocks, bonds, mutual funds, real estate, and other assets. The purpose of creating a portfolio is to diversify your investment risk and potential return. By investing in a mix of different asset types, you can reduce your overall risk while still having the opportunity to earn a higher return than if you had invested in just one type of asset.
How can I leverage my investment portfolio?
There are a few different ways that you can leverage your investment portfolio to make the most of your money. One way is to diversify your portfolio by investing in a variety of different asset classes. This will help to mitigate risk and protect your portfolio from fluctuations in any one particular market.
Another way to leverage your portfolio is to use investment strategies such as dollar-cost averaging and portfolio rebalancing. Dollar-cost averaging involves investing a fixed amount of money into a security or securities at regular intervals. This strategy can help to smooth out the effects of market volatility on your portfolio by buying more shares when prices are low and fewer shares when prices are high.
Portfolio rebalancing is another strategy that can help you to make the most of your portfolio. This involves periodically selling off assets that have increased in value and buying more of those that have lost value, to maintain your desired asset allocation. This helps to keep your portfolio balanced and aligned with your investment goals.
3. Mutual Fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. Mutual funds are diversified, which means they invest in many different types of securities at the same time. This diversification helps to reduce risk because it ensures that the fund will not lose all its value if any one security declines in value.
What are some advantages of investing in a mutual fund?
– Professional management: Mutual funds are managed by professional money managers who make decisions about where to invest the fund’s money. This frees investors from having to research and select investments themselves.
– Diversification: As mentioned above, mutual funds invest in a variety of different securities, which helps to diversify the fund and reduces risk.
– Affordability: Mutual funds can be purchased for a relatively small amount of money, making them accessible to investors with a limited budget.
What are some disadvantages of investing in mutual funds?
– Fees and expenses: Mutual funds charge fees for managing the fund, and these fees can eat into your investment returns.
– Risk: Although mutual funds are diversified, they still carry some risk because the value of the securities they hold can go down in value.
Investors should carefully research mutual funds before investing to make sure they are comfortable with the risks and fees involved.
What are some of the top mutual funds?
Vanguard Index Funds:
Vanguard is a well-known investment company that offers several different index funds. These funds track different market indexes, such as the S&P 500, and can provide a good way to diversify your investment portfolio.
Fidelity Investments:
Fidelity is another large investment company that offers a variety of mutual funds. Some of their more popular funds include the Fidelity Contrafund, which invests in stocks of companies that are growing faster than the overall market, and the Fidelity Magellan Fund, which is a large-cap stock fund.
T. Rowe Price:
T. Rowe Price is a mutual fund company that offers a variety of funds, including both equity and fixed income options. Some of their more popular funds include the T. Rowe Price Blue Chip Growth Fund, which invests in large companies with strong growth potential, and the T. Rowe Price Dividend Growth Fund, which invests in companies that have a history of paying dividends.
4. Net Profit
Net profit is a way of measuring how profitable a company is. It considers all revenue and costs, including tax expenses. The net profit figure is therefore the final profit figure that a company reports.
It’s important to note that net profit is different from gross profit. Gross profit simply considers the cost of goods sold, and does not include other costs such as taxes, overhead, or interest expenses. Net profit is therefore a more accurate measure of profitability.
How do I calculate net profit?
There are a few different ways to calculate net profit, but the most common method is to take total revenue and subtract all expenses (including taxes and interest). This will give you the net profit figure.
What is the difference between net profit and net income?
Net profit and net income are two terms that are often used interchangeably, but there is a subtle difference between the two. Net profit refers to a company’s total earnings, while net income specifically refers to the amount of money that is left over after all expenses have been paid. In other words, net profit is the total revenue minus the total expenses, while net income is the total revenue minus the total expenses and taxes.
5. Stock
A stock is a type of security that represents ownership in a corporation. Stocks are also known as equities. When you own stock in a company, you are essentially owning a small piece of the company. You may have voting rights and receive dividends, but you also accept the risk that the stock price could go down.
Stocks are bought and sold on stock exchanges, such as the New York Stock Exchange (NYSE) or the Nasdaq. The stock price is determined by supply and demand. When more people want to buy a stock than sell it, the stock price goes up. When more people want to sell a stock than buy it, the stock price goes down.
How do I buy a stock myself?
If you’re interested in buying stock, there are a few things you should keep in mind. First, you’ll need to decide what kind of stock you want to buy. As listed earlier there are two main types: common stock and preferred stock. Once you’ve decided what kind of stock you want to buy, the next step is to find a broker. A broker is someone who buys and sells securities on behalf of investors. You can use an online broker or a traditional broker. If you’re not sure which one to choose, it’s a good idea to compare the fees and services offered by each.
Once you’ve found a broker, you’ll need to open an account with them. Then, you can start buying stock. To do this, you’ll need to place an order with your broker. They will then execute the trade on your behalf. It’s important to remember that stock prices can go up and down, so you should only invest money that you’re comfortable losing. Also, don’t forget to diversify your portfolio by investing in different types of stock and other securities.
If you are unsure about which stock or broker, you are comfortable with using, please reach out to a financial advisor or call the broker and speak to a customer service representative.
6. Roth IRA
A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. Contributions to a Roth IRA are made with after-tax dollars, so you won’t get a tax deduction for your contributions. However, all earnings and withdrawals from a Roth IRA are tax-free. Roth IRAs are popular because they offer tax-free growth and tax-free withdrawals in retirement. Roth IRAs are a good choice for young investors who expect to be in a higher tax bracket when they retire.
What are different types of Roth IRA’s?
There are two main types of Roth IRAs: Traditional Roth IRAs and Roth 401(k)s. Traditional Roth IRAs are opened with a brokerage firm, and Roth 401(k)s are offered by employer-sponsored retirement plans. Both types of Roth IRAs offer the same tax benefits.
How much money can I add to my Roth IRA?
Contributions to a Roth IRA are limited by your income and tax filing status. For 2020, the maximum contribution was $6,000 ($7,000 if you’re age 50 or older). If you’re covered by an employer-sponsored retirement plan (such as a 401(k)), your matched contribution limit may be reduced or eliminated.
Roth IRAs have no required minimum distributions, so you can leave your money in the account to grow tax-free for as long as you want. This makes Roth IRAs a good choice for retirement planning and estate planning.
What happens when I withdraw my money early?
If you withdraw money from your Roth IRA before age 59½, you’ll generally owe income tax plus a 10% early withdrawal penalty. However, there are some exceptions to this rule. For example, you can withdraw up to $10,000 penalty-free to help buy a first home. Roth IRA withdrawals are taxed as ordinary income, so they may be subject to a higher tax rate than long-term capital gains.
7. Return on Investment
ROI, or Return on Investment, is a performance metric used to evaluate the efficiency of an investment. ROI measures the amount of money gained or lost on an investment relative to the amount of money invested. It is usually expressed as a percentage.
How can I calculate Return on Investment?
There are several ways to calculate ROI, but the most common method is to divide the net return of an investment by the cost of the investment. This gives us a ratio that can be compared against other investments. For example, if you are considering investing in a new piece of equipment that is expected to cost $1,000 and will generate an additional $3,000 in revenue each year, the ROI would be 200% (i.e., $3,000-$1,000/$1,000). This means that for every dollar you invest in the equipment, you can expect to make two dollars in return.
Formula
ROI = [(Gain on Investment – Cost of Investment) / Cost of Investment] x 100
OR
ROI= (Net return/Cost of Investment) x 100
Can ROI be negative?
ROI can be positive or negative. A positive ROI means that an investment has generated more money than it cost to make, while a negative ROI means that it has lost money.
8. Cash flow
Cashflow is a measure of a company’s financial health. It tells you how much cash a company has on hand, and how well it can generate cash in the future. A company with strong cash flow is better able to pay its bills, expand its business, and weather economic downturns. There are two types of cash flow: operating cash flow and free cash flow.
Operating cash flow is the cash that a company generates from its normal business operations. This includes things like sales, rent, and expenses. Free cash flow is the cash that a company has available after it pays for things like capital expenditures such as new equipment or buildings.
How can I calculate cashflow?
To calculate cash flow, you need to know a company’s net income, its cash, and equivalents (such as cash in the bank or investments that can be quickly converted to cash).
From there, you can use the following formula:
Cash Flow = Net Income + (Depreciation & Amortization) – (Capital Expenditures)
9. Inflation
Inflation is when the price of goods and services rise over time. This means that the purchasing power of money decreases, as people need more money to buy the same things. Inflation can be caused by a variety of factors, including an increase in the money supply, demand-pull inflation, or cost-push inflation.
While inflation is generally considered to be a bad thing, it is important to remember that a small amount of inflation is actually good for an economy. This is because inflation encourages spending and investment, as people are more likely to do so when they expect prices to rise in the future. Additionally, inflation can help reduce unemployment by making it easier for businesses to raise wages without having to worry about inflation eating into their profits.
However, too much inflation can be very harmful to an economy. When inflation is high, it can lead to economic stagnation, as people are less likely to spend and invest. Additionally, high inflation can cause a decrease in the value of money, which can lead to financial instability.
What are four types of inflation?
There are four types of inflation: cost-push inflation, demand-pull inflation, repetitive inflation, and stagflation.
Cost-push inflation- happens when the prices of goods and services increase due to an increase in the cost of production. This can be caused by things like a rise in the price of raw materials or an increase in labor costs.
Demand-pull inflation- occurs when there is an increase in demand for goods and services in the economy. This can lead to prices rising to meet this increased demand.
Repetitive inflation- is inflation that happens on a regular basis, even when there is no change in the underlying economic conditions. This type of inflation can be caused by things like inflationary expectations or changes in the money supply.
Stagflation- is a combination of inflation and economic stagnation. This happens when the economy is not growing, but prices are still rising. This can be caused by things like a decrease in aggregate demand or an increase in production costs.
10. Recession
A recession is when a country’s GDP (gross domestic product) shrinks for two consecutive quarters. This means that the economy is not growing and may even be contracting. A recession can have several causes, including a slowdown in global trade, an increase in interest rates, or a major shock to the economy such as a natural disaster.
What are few key indicators that can help us predict if a recession is on the horizon?
One important indicator is the yield curve. This measures the difference between short-term and long-term interest rates. When the yield curve flattens or inverts, it can be a sign that a recession may be coming. Another key indicator is employment. If we start to see a rise in unemployment, this is often a sign that a recession is on the way. Finally, another important recession indicator is consumer spending. If consumers start to cut back on their spending, this can be a sign that a recession is coming.
What can we do to protect our finances in a recession?
There are several things we can do to protect our finances during a recession. First, it’s important to have an emergency fund in place. This will help you cover unexpected expenses if you lose your job or have another income interruption. Second, be mindful of your spending. Track your spending and cut back on unnecessary expenses. Third, create a budget. This will help you make the most of your income and keep your spending on track. Fourth, Invest in yourself. Recession Proof your career by taking courses, networking, and building your skillset. Fifth, stay diversified. Don’t put all your eggs in one basket. Diversify your investments so that you’re prepared for whatever the market throws your way.
Conclusion:
That’s it for our list of 10 financial terms every young professional should know: part two. We hope you found this helpful and that it provides a strong foundation as you continue learning about personal finance. Please feel free to share with your family and friends. As they say, knowledge is power, and the more people who understand these concepts, the better off we all will be. Have questions or comments? We’d love to hear from you! Leave us a message below. Thanks for reading! Check out part one of this series! 10 Financial Terms Young Professionals Should Know: Part 1
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