Basic terms of Finance
Tangible assets are usually referred to assets that are physical in nature and the value of which can be easily determined. For example, cars, buildings, furniture, machinery, are all examples of tangible assets. On the other hand, the value of intangible assets is theoretical in nature and not physical, the value of which is harder to quantify. Patents, brand value, licenses, etc are intangible assets.
Treasury bonds are bonds (loans) given out by the US government which are for a period greater than 20 years. The bond owners receive periodic interest payments for the duration that they hold the bonds for. Treasury bonds play a big role in the functioning of the global economy. The US government is considered the safest/least risky borrower in the world.
ROI – Return on Investment
Return on Investment (ROI) is a popular profitability metric used to evaluate how well an investment has performed.
A credit limit is imposed by lenders (very often, banks) as the upper limit or maximum amount a borrower can borrow. This is aimed at preventing over-borrowing by the borrower and it also helps lenders minimize their risk. Credit cards have credit limits that are often decided based on a person’s income level and credit score.
A credit score is a numeric representation of an individual’s creditworthiness. The creditworthiness of a person tells us if he/she will be able to clear off his or her loans. Defaulting on credit card bills and loan payments downgrades your credit score whereas being on time with all your credit payments keeps your credit score high. Banks use a credit score to decide if you qualify for a loan and the interest rate which should be charged for you. Therefore, if you have a low credit score, there are high chances you will be asked to pay a higher interest rate on a loan as compared to someone who has a higher credit score.
In finance, liability refers to money owed. Say you took a loan. Then, you are liable to pay back the amount and the interest on it in a timely manner. Your list of liabilities can include things like home loans, car loans, credit card bills, other EMIs, etc. Unpaid bills are also a part of your liabilities.
When you take out a loan, you need to provide collateral. In case you fail to service your loan, the collateral can become the property of the bank. The bank will then try to sell the property and recover the money you have failed to pay. When you take a home loan, the home being purchased itself is the collateral. In the case of car loans, the car being purchased is the collateral. In certain education loans, the borrower may need to give something else as collateral like a property. Some loans have no collateral. These loans are usually of a very low value or carry a very high-interest rate or a mix of both.
Digital gold is a way of purchasing gold online. You can buy and sell gold at the live market price without actually owning physical gold. Digital gold does not involve any making charges as you are essentially owning gold electronically and not buying jewelry from a shop. It is often considered a convenient and cost-effective way to stay invested in gold.
This term is most often used in the startup world though it is relevant in many other places also. It refers to the amount of money being spent. Your personal burn rate would refer to the amount of money you spend on a regular basis. It is used to estimate the duration for which a particular amount of money will last. Your burn rate should be lower than your income for your wealth to build.
Net Interest Income
Net interest income is the difference between the interest income a bank earns from its lending activities and the interest it pays to its depositors.
Current account and savings account ratio (CASA ratio) is the ratio of deposits across current accounts and savings accounts to the total deposits that a bank has. A higher CASA ratio means a bank has more cheap money. This is because the interest a bank pays out on savings accounts deposits is lower than the interest it gives on other forms of deposits. Also, most current accounts do not pay interest to their account holders. With more cheap money at hand, the bank can give out more loans at a lower cost. If the CASA ratio is low, a bank may have to rely on a costlier source of funds.
Haircut in finance refers to a reduction applied to the value of an asset. This happens when the lender (like a bank) has to settle for a lower value than it was supposed to get back. For example, let’s say a bank gives a loan of Rs 1 crore to a borrower. At the time of returning, the borrower is not capable of paying back the entire amount. The borrower can either pay back Rs 50 lakh or default on the loan itself. If the bank accepts the Rs 50 lakh offer from the borrower, it is said that the bank took a 50% haircut on the loan.
This is negative news of that Bank and also its stock price is low.
Budget is a wide term mostly used to describe a plan of income and expenses. For example, the government declares its budget for the country every year. Likewise, a budget can be for anything including your personal budget, a company’s budget, or even a budget for a shorter period, an event like a budget for a holiday, for a wedding ceremony, and so on. The act of making a budget is often called budgeting.
It is also called the Annual Financial Statement. It is the annual budget of India. It is usually presented in the first week of February. It is an account of the finances of the Government of India. Major economic policies are announced in the budget that includes taxation, incentives, spending in different sectors like education, health, defense, and so on.
Based on Budget announcement, stock market may react positive or negative.
Gross Domestic Product (GDP)
The Gross domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time.
GDP = private consumption + gross investment + government investment + government spending + (exports – imports)
Real GDP growth is the value of all goods produced in a given year.
Nominal GDP is value of all the goods taking price changes into account
Wholesale Price Index
It measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses. WPI keeps track of the wholesale price of goods
Consumer Price Index
It measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households. It tracks the prices of goods and services purchased by consumers.
B2B stands for business-to-business. B2B firms sell their products and services to other businesses. E.g., IndiaMART, Alibaba.
B2C stands for business-to-consumer. B2C firms sell their products directly to the consumers. E.g., Amazon, Flipkart, TataCliq.