Top Financial Terms Traders Should Know

Top Financial Terms Traders Should Know: Before stepping into the reality of financial markets, acknowledging the terminologies help like nectar to a bumble-bee. It is a harbinger that assists in delving deeper into meanings of various divisions of economies. For awareness and crafting a better future in the field, the following definition will be handy. Here are some needful points illustrating essential information.

Need To Know Top Financial Terms

Asset Allocation

It is a strategic exercise by an investor to put their money into some investment-worthy place or item attempting to fetch good returns against any risk, making their portfolio stronger. The planning can be useful in balancing the investment.

The primary asset classes are mutual funds, stock markets, cash, bonds, and commodities. And experts argue for putting out some part of the share of the investment in every available asset. It is because principally each one of them performs differently in the diverse conditions and situations.

For example, there are significant volumes in the forex market, and it is highly volatile. There’s a fine line suspended by a thin thread where chances of making and losing money are equal. Hence, it is wise to dispense the funds in varied assets. The practice would minimize potential threat ascribed to the loss of money. One can find six types of classification to it.

  • Strategic Asset Allocation
  • Dynamic Asset Allocation
  • Integrated Asset Allocation
  • Insured Asset Allocation
  • Constant-Weighting Asset Allocation
  • Tactical Asset Allocation

Net Worth

It is the value of a financial and non-financial asset chalked-out after subtracting all the expenses and liabilities out of it. In simple words, it is the disparity of valuation between the asset owned and the overall commitment.

An investor can calculate it by attaching all the property, including cash, land, an array of investments in distinct markets, the present rate of the vehicle, home, insurances, and other balances. Then, minus it all from all the loans, credit card liability, debts, mortgages and several obligations. The amount left is the net worth. It can be supporting in ascertaining the financial health of any business or an individual.

There are precisely four types of net worth;

  • Country
  • Individual
  • Company
  • Government

They all wield responsibility on different levels, but the formula for the calculation is alike for each of them.

Compound Interest

People have known compound interest (CI) terms as they’ve read it in schools during mathematics class. It is the joint of interest on an interest imposed on a principal sum of money. It applies to the amount lent, deposited or borrowed from a bank or a financial service provider institution.

But there’s a slight difference where and how it gets applied on a loan and savings amount. While borrowing, compound interest is often charged on the funds a person loaned along with the interest charges that follow.

Whereas, the application of CI on investment happens a different way. It applies to the deposited money and the amount of interest accumulated during a stipulated time period.

Umbrella Insurance

It is quite uncommon insurance that does not go much into the notice of investors. It offers additional or extra coverage for liabilities, which is beyond insurance for life, home, automobile, health, travel, pet etc. This particular insurance has features like saving you from likely damages of property, injuries to other people, precisely the ones working with you at your place like nannies. It also defends you against any legal suit or charges of defamation.

Also, if anyways the misfortune occurs directly or indirectly through your involvement, then it is always there to cover-up.

Investors refer to it as liability insurance too. The policy comes into play when other insurance policies exhaust.

Earnings Per Share

EPS, as it is known generally, is a calculation for the amount of profit accumulated by a company listed on a stock exchange. Often, companies the public their report yearly or quarterly mentioning all the profits, losses and net income.

It calculates by taking out a remainder after paying off the dividends and then figuring the net income of the stocks and then dividing by the average of outstanding shares.

For example: Suppose a company earns $30 million as net income and dispense $5 million as dividends to the legitimate stockholders. Let’s say the company owns 20 million outstanding shares in the first quarter followed by 10 million in the subsequent one. That’s an average of 15 million shares.

So, this is how the calculation will go:-

$30m$5M =25million

$25m/$15m= $1.66 per share

However, the diluted earnings per share take more than what meets the eyes. It takes into account the convertible securities for calculation.

EBITDA

It is a type of metric used to find the valuation of a company and its operating performance. It is synonymous or a kind of proxy observing the cash flow. For calculation, the operating costs and expenses deduct from the collected revenue. After that amortization and depreciation get added again.

For the income statement, it excludes taxes, the interest expenses and several non-operating costs. EBITDA is concerned with the matter beyond net income.

Re-balancing

It means bringing to balance a portfolio gone astray by putting up the desired percentage of assets. It helps in preventing an investor from unwarranted risks. Re-balancing evades investors from a brimming peril of overexposure. of other domains besides the field of expertise.

For example, if an investor has the allocation for different assets viz 40 per cent for stocks, 30% for commodities, 20% for bonds and 10% for others. Suppose, if the commodity market outperforms the others, then there is a possibility that the investor invests more into it. And compared to others, the percentage in the instrument rises to 50 per cent. Hence, it will mismanage the portfolio. Also, due to distinct volatility, it can cause perils. So, there needs to be a balance and shooting back to the sanity is re-balancing.

FICO score

Fico is an acronym for Fair Isaac Corporation. It is a company that helps in assessing the credit risk pertaining to loan owners or borrowers. The score let the user reach a decisive and logical conclusion for the credit-related risk. It ranks investors based on their capacity of paying the money borrowed in the agreed time.

The score considers several parameters in asunder areas of expertise to acknowledge the worthiness of credit. It checks types of credit, credit history, payment history, duration of the credit, the present level of indebtedness, among others.

Wise words For Top Financial Terms Traders

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