Busting financial jargon – old and new

Girl studying in the dark. Photo credit: Andrés Nieto Porras

Bust the financial jargon and understand how money works. Photo credit: Andrés Nieto Porras

Want to invest but don’t understand the money lingo? Here are some plain English translations of the jargon – new and old.

Although Kate & Whio is aimed at women, jargon-busting is helpful for anyone wanting to understand the big money picture. But as women now make a lot of financial decisions, both for themselves their families, I think we need to know what the finance people are talking about. And don’t be shy about asking, research shows women are good at investing – we’re way better than we think.

Busting the financial jargon is also often the first step on the road to good investment and managing money. There are also new terms worth learning, like equity crowdfunding and peer-to-peer lending.

What the jargon really means

Annuity

An annuity is a finance product that allows investors to save for a pension. After a set period of time the pension fund pays out a stream of payments, so providing an income after retirement. This can be for the rest of your life or for a fixed term.

Bonds

A bond is a debt or IOU issued by a company or government body. You, the investor, earn interest on the debt until it is repaid at a pre-determined time, known as a “maturity” date.

Bonds are traded on the NZX’s debt market, but they are not risk-free, especially if they are traded frequently, which is why they are recommended as long-term investments.

Compound Interest

This is interest on interest – that is, interest is added to your savings balance and then you earn interest on that new overall total, so making savings grow quicker. The downside of compounding interest is that it can also pile up debt fast. It can be your greatest friend or enemy. Credit card debt, for example, uses compound interest against you – if you only pay off the minimum amount each month you will likely never be debt-free.

Credit Report

Credit reference agencies store information about your financial affairs and how you manage them, and so give you a credit rating. Lenders use these agencies to decide if they want to give you credit.

Crowd funding

Crowd funding started out as donation or reward crowd funding. People would use a website like Kickstarter, in the US, or PledgeMe here is New Zealand, to ask mainly friends and family to donate to a project. These were usually arts or charity projects, or a new technology product. People often a get a reward, like discounted theatre tickets, for donating.

Crowd funding now has a new arm – equity crowd funding – which allows companies to showcase themselves on the website and sell shares (also called equities). Although it is risky for investors, equity crowd funding can help start-up companies and young people fund new ventures. Overseas, women have been keen on crowd-funding.

Fixed Rate

This is an interest rate that does not change. It can be on loans or a mortgage, or a savings account.

Floating rate

This is an interest rate that can move either up or down. It can be on mortgages or loans, and is sometimes called a variable rate.

Issuers

This is what the NZX calls companies selling either shares, on the equities market, or bonds, on the debt market, so they can raise money to fund growth.

Mutual fund

This is an investment made up of a collection of stocks, bonds or other investments. Buying a mutual fund allows you to invest more widely without buying a number of investments yourself. Mutual funds are run by money managers who invest according to the fund’s stated aims.

NZX

The NZX is the old New Zealand stock exchange. It trades in stocks, also called shares or equities, and bonds. Stocks are traded on the equities market, while bonds are traded on the debt market. The equities market sells shares in companies, while the debt market sells debt, like the government’s Earthquake Kiwi Bonds.

One way of looking at the NZX is as a TradeMe for shares. It is simply an exchange where shares (also called stocks) in companies are bought and sold. Companies ‘list’ so they can sell their shares on the exchange and have to abide by certain rules. They also have to pay fees to the NZX.

Peer-to-peer lending

This is another form of crowdfunding. It also uses a website as a public showcase and seeks money from ‘the crowd’. But peer-to-peer lending is not about selling company shares. It is a matchmaking service that brings borrowers and lenders together. It is risky, but the appeal is better-than-the-banks interest rates.

Securities

A catch-all term for all kinds of investments, including shares, bonds and mutual funds. Think tangible, so, for example, gold bars aren’t securities but a fund that invests in precious metals is a security. However, although your car is tangible it is not a security.

Stocks, shares and equities

Stocks and equities are alternative terms for shares. Companies sell shares (equity) in themselves. A share being a fractional interest in a company’s business. So, when you buy a share you are buying part of a business. This means you have a claim on its assets – what the company owns – and its earnings, as you now have a stake in the business.

This is just a first look at money jargon. Look out for future posts on this important topic

© Johanna Bennett,2014

Disclaimer

Johanna Bennett is a financial and technology journalist who thinks women need to know more about the big picture when it comes to money. Her blog, Kate & Whio, is intended to help and to educate, but the information contained in it should not be taken as specific financial advice. You are responsible for your own money decisions.

One thought on “Busting financial jargon – old and new

  1. Pingback: Crowd-funding – hot but risky | Kate & Whio

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